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Buying a Home Post-Filing
UNDERSTANDING CREDIT – PART 2
In this section, we help you identify the different factors that apply when buying a home after filing bankruptcy.
Your Credit Score
Your credit score is the first aspect of qualifying for a mortgage. When applying for a mortgage, the lender will request your credit from all three credit reporting agencies, and will use the middle score for qualification purposes. Mortgage lenders have credit score guidelines that are broken down into tiers, such as 720+, 680 – 719, 620 – 679, and those scores beneath 620. Which tier an applicant falls in, will determine the interest rate or whether an applicant even qualifies. On this last point, there is one exception, where some loan programs are underwritten via an automated process, which may overlook a lower score. If the program approves the applicant, the lower score is waived.
As a helpful tip, borrowers should know that if a credit reports has inaccurate information that can easily be shown as such, most lenders have “rapid rescoring” options, which allow applicants to dispute issues on an expedited basis. If a borrower has filed bankruptcy, the actual bankruptcy should have cleaned up any outstanding credit disputes. Borrowers should start speaking with a mortgage broker 6 months prior to applying for the loan if there are any credit concerns – this will allow ample time to address any credit issues.
A good credit score is essential to the lending process. A higher score can lower the premium for mortgage insurance and can reduce the amount of requested documents needed to approve the loan. Also, a higher score can help applicants seek an exception to particular lending guidelines. Finally, the higher score will qualify an applicant for a lower interest rate. However, to get the lowest interest rate, an applicant should research rates and respective closing costs.
Beyond a credit score, lenders are looking at the big picture. An applicant must have an acceptable “debt-to-income” ratio and have ample reserves. The debt-to-income ratio is essential to determine that the future homeowner has enough money each month to make the mortgage payment. Lenders also look at employment history, such as how long an applicant has been with that employer or in that industry. Finally, lenders look to see if an applicant has collateral, such as reserves via a retirement or stock accounts.
Consumers that file bankruptcy have great debt-to-income ratios. All unsecured and dischargeable debts are removed from the calculation. This helps consumers focus their income on mortgage payments, versus high interest rate credit card debt, or other detrimental debt obligations.
Finally, lenders want to make sure their loan is secured against valuable collateral. Therefore, lenders require a complete residential appraisal and title report with each loan. The appraisal compares the home value to other comparable homes in the vicinity. The title report insures that the home is free and clear of liens or other issues upon closing the loan. Often, the bank is protecting homeowners from overpaying for a property, by denying a loan based upon the purchase price exceeding the actual fair market value of the home.