Life After Bankruptcy: How Soon After Bankruptcy A Filer Can Qualify For A Home Mortgage
With a little bit of communication, let’s start off with the substance of our discussion. I hope you all will enjoy a little fun costume here and a little bit of self-deprivation, but we wanted to highlight that this is what we consider to be a superhero team-up. Diane and I are both very experienced in our respective areas and we got to talking. We realized that in so many instances, we are dealing with the same people in different parts in their life journey. To start with some introductions, my name is Mike Ziegler, I’m a managing partner at the Law Office of Michael Ziegler.
Our office focuses on folks that have experienced a bump in the road of life and that bump can take a lot of shapes and forms. Sometimes it’s temporary bumps. Sometimes it’s a long-term change in circumstances, but the result of that bump is usually some sort of alteration, particularly with respect to the income side of the equation. Sometimes to the expense side of the equation that creates legal problems, whether that be sometimes lawsuits, sometimes a foreclosure action, sometimes some difficult phone calls.
Our role is to provide guidance and legal options that help to find a path through that bump, whether it be through defending or negotiating a credit card action, sometimes defending a foreclosure action. In other instances, filing for bankruptcy. Diane, tell us a little bit about what you do.
Yeah. I’m Diane Vance, a.k.a. Batman, with Fairway Independent Mortgage. I’ve been in the mortgage business for 31 years. Mike and I have talked about how to actually work together. I’ve sent Mike several customers and they have given raving reviews about Mike. He can help us with things like getting collections removed and judgments and things like that, and helping to go through the process. Fairway Independent Mortgage is a national company and we are in the local market. I enjoy sitting down with customers or doing a Zoom meeting to explain the process.
I can share screens and go over everything that we are talking about. The reason Mike and I got together is because there’s a lot of… Bad things happen to good people all the time. There is always answers to be able to purchase a home in the future or there are answers whenever you’re having financial difficulty through Mike, and then of course, through myself to help you actually navigate that.
This to me is such a great opportunity because Diane has this incredible vantage point working with a group of four different locations, having been in this industry for years, not only within Fairway, but with other major lenders as well. She sees the real-life experience that a lot of times the folks that I meet with are dealing with. She sees this through the vantage point of hey, two years out, five years out, how does that translate into credit scoring and to qualification for lending.
Most importantly, from a proactive perspective, what can you do to best align yourself over the course of that journey to set yourself up for success? Let’s dig into some of the substance of some of these situations. First, let’s highlight what some of these situations are. Diane, what are some scenarios that you see, particularly when you’re reviewing qualifications for mortgages, things that come up, and may have to be overcome?
Yeah. The biggest thing is that the first thing we start with is FICO credit score. FICO credit scoring is determined by how we make payments, even if you’ve had a bankruptcy or foreclosure or negative information in your credit report. It may show a low credit rate score when you first start, but you can always overcome that very quickly as far as improving your FICO credit score. People are very afraid. Once they file bankruptcy or foreclosure, for some reason they don’t think they can purchase again, but that’s not true. We do it all the time.
There are a lot of people in the crash that had financial difficulty that we have been able to help. The FICO credit scoring is most important. The way my customers or your customers can actually improve after bankruptcy or foreclosure, or anything negative on your credit report, is always you can get an annual free credit report every year to look at how accurate it is. Once you file bankruptcy, you want to make sure that those things are showing on your credit report through the annual free credit report that is actually going to show what’s negative and what’s not.
Make sure those debts that were forgiven in the bankruptcy are actually in the bankruptcy. Make sure it’s showing on the credit report correctly. That’s the first thing you do. Then after that … Or a foreclosure or anything negative. Then after that, what you want to do is keep your credit balances, so you want to have a credit card or something like that. After bankruptcy, just don’t … How should I say this? You don’t want to have too much credit, but you also want to have some credit. Some people, once they file bankruptcy, they pay cash forever, but it doesn’t help the credit score.
The number of credit cards you have or something like that is important that you keep the limit very low, at a third of whatever the limit is. Let’s say it’s a thousand dollars, keep your credit card limit to $300 or so, pay it off. You can pay it off $10 a month or whatever it is. Just don’t get it to the maximum or above. That’s the biggest thing after bankruptcy, is to rebuild your credit. That’s one way to do it. You can do it with a secure credit card through a bank. I have some banks that will do that. I have some connections that will do secure credit cards.
Then after that, you can always get a store credit card. You don’t want to overextend yourself, at the same time you want to rebuild to show that, hey, this happened to me, but it’s not going to happen again. That’s what happens, is most of the time I see low credit scores when they’ve not actually checked on their credit, they let it go. Not so much, let it go in terms, but didn’t check to make sure if they’re any collections on there or if there are any [inaudible 00:06:56].
When you have a collection or judgment or something like that, that’s when you’re going to get involved with you. That’s when they would actually call you to actually help them. Matter of fact, you helped one of my customers on that. I think she had an old lease that was showing up forever and you helped her.
That was affecting her credit score. You really want to make sure that you’re doing those things, and just keep track of your actual credit reporting. Not so much the score. You can get your score. If you get a Capital One credit card or any of the banks out there that offer credit cards, and you can ask for FICO credit scoring and they will send you monthly what your FICO credit scoring. We can do loans as low as 580 credit scores.
Wow. That’s awesome.
You can purchase with a 580 or above. You can actually purchase lower than that. However, that becomes not sure that … I like to be certain when you start a loan that you’re going to finish the loan. We want to make sure that we can actually deliver. A lot of counseling goes into upfront, actually helping the person understand how to actually build a credit. I have a credit tool that is actually available, that I can actually do a simulator that if they do this, it’ll do this. If they open up a credit card or do this how long will it take to actually get their credit score there?
Now, a lot of times, too, what we can do is let’s say you have a 580 credit score, you’re going to get a better interest rate at 600 or 620 and above, but I can actually show how to do that. I can give them instructions on how do I actually do that? The simulator is basically something that we purchase as a lender that tells them, and it’ll tell me what timeframe that they would have to wait to get their credit score up to a certain amount. Yeah. You get better credit scores.
Okay. So much great information in there. I’m going to unpack some of that.
First, Diane and I were talking before we kicked off about what the differences in working with a mortgage company like a Fairway, as opposed to all these things that you hear about online, where you just punch in some numbers and something spits out. A lot of what I was hearing in that critical difference is working with professionals so that you can plan. What it sounds like I’m hearing from you is that when someone comes in that had a bump in the road, when you are starting with that planning process, you start with the basics by pulling the credit report itself, looking at what’s on there, identifying some of the negative information.
It sounds like when you’re looking at negative information, that that critical part there is ensuring the accuracy.
We were talking about bankruptcy being an example. If someone’s filed for bankruptcy, you want to make sure that those debts that were discharged, are identifying as zero balance discharged debts instead of still showing some sort of a balance, is that-
Now, the other thing on bankruptcy, if somebody is filing bankruptcy, it’s very important if they own a home, put the home in the bankruptcy, because a lot of times we’re going to file on seven foreclosure rules. Bankruptcy is less years to wait.
Oh, that’s interesting. Okay.
Foreclosure rules, it follows the bankruptcy under a conventional mortgage, which we won’t get into the conventional and FHA today and VA, but it will follow that. You always want to have a house in your … even if you’re planning on keeping the home and paying for it and selling it later or whatever, make sure it’s in there in case you ever do foreclose, that it’s part of the bankruptcy.
If I can turn that around on you, if it looks like a reasonable certainty that someone who’s filing for bankruptcy will be able to maintain their mortgage payments.
Just to sidetrack, so we’re talking about, in the bankruptcy world is called reaffirmation.
When you file for bankruptcy, there may be some loans that you want to maintain responsibility on. Usually that would be your house or a vehicle, and then you enter into an agreement within the bankruptcy process called a reaffirmation. From a credit perspective, the importance of reaffirmation is that the payments or missed payments, good or bad, will continue to show up on your credit report. If it seems like there is a reasonable certainty that the filer will be able to continue to make their mortgage payments, do you think that would be … in most instances, we’re all … and this is all generalities, of course, right?
Is do you think that would be better than discharging the home loan?
It depends on the situation.
It really does. It depends on what the customer is planning to do. The ruling says that on regular loans, conventional loans, not FHA, they will follow the bankruptcy guidelines versus a foreclosure guideline. Foreclosure and conventional are seven years. Bankruptcy is only four.
You always want to put the home in there, whether you reaffirm it or not, but even if they’re planning on selling it or if they are going to foreclose, of course, put it in there. If they’re planning on giving the keys back or something, of course put it in there. Even when they’re reaffirming, just in case later on … Because we see a lot of bankruptcies and then later on, they have a foreclosure.
I see. Okay.
If it’s in the bankruptcy, then those supersede the foreclosure bank-
I want to touch on two things that you’re hitting on here. First, a lot of times, I think when I have my initial consultations, the fear is that when someone has some negative event, whether it’s bankruptcy or foreclosure, or even something just like missed payments in themselves, the fear is that they’ll basically have virtually zero credit for the next 10 years. Credit scoring is a lot more than just one thing.
Can you give an overview of some of the components that go into credit scoring?
Yeah. Your FICO credit score is based on really the most recent, the number of how much credit do you have. Let’s say you have some credit cards and you didn’t discharge. You reaffirm some of them, you want to keep them. You want to make sure that those credit cards are paid, of course. After a bankruptcy or foreclosure, you want to make sure that your credit is … It doesn’t mean that it … Even if you don’t pay them, the most important is the last two years, last 24 months are the most important for the credit scoring as far as where it goes.
The number of credit cards, the history of your credit. When you have a credit card, if you pay it off, you don’t want to close it. You want to keep it there because that’s a history.
I had a customer that actually paid off all of his credit cards, closed all those credit cards, so when he went to actually … he had a car loan and that was it. When he came to do a mortgage, he didn’t have a history of credit because he had closed them off because he had a bad experience because he had filed a bankruptcy. He had a bad experience so he was saying, “Oh, that’s the right thing to do.” You don’t want to do that. You want to have a history. Even if the older is a negative history, you still can overcome that over time.
The last 24 months is what actually is the most important thing. Credit scores are based on … There is an algorithm that is actually done on your monthly payments. How much credit do you have? The history of your credit, the credit limit to the actual balance. All those things go into credit scoring.
Just to recapture what you’re saying here, so even with the negative event, credit scoring is going to be most emphasized based on the last 24 months.
There’s definitely an opportunity to build on top of a negative event, particularly if you can find closure to whatever those negative events are. A lot of times I talk to clients about the anchor. If you continue to have missed payments on a going forward basis and continue to have issues in the future, you talked about a future foreclosure.
That, of course, is going to continue to be a drag on your credit, but if you can find ways of concluding those issues then you can start to build on top of them.
Then we focus on things like the length of the time that you’ve had loans, and-
Opening up some credit and keeping it current.
Current payments, utilization rates, so there’s a lot of things proactively that can be done. Now, we’ve talked a few times and we’ve sprinkled in I think some of the hints about timelines. I think that’s a common question that I hear, is, how long will I have before I can start to apply for a mortgage in particular, car loans? Things like that. Can you give us an overview of what some of that looks like?
I don’t do car loans but car loans are typically right away. I think you can do it right afterwards. Just it’s going to be based on your interest rate, of course it’s going to be higher if it’s … Again, that’s an algorithm for the credit score. Credit scores on mortgaging is different than car loans. It maybe a little more forgiving under the car loan. Your credit score might be a little higher under a car loan than it would be a mortgage.
Okay? As far as the … I actually forgot what we’re talking about.
Length of time from-
Oh, length of time. Okay. We can actually do mortgages two years after a major event. The interest rate will be higher under that program, however … and you’ll have to have some down payment, so typically 10% down.
That’s still great.
Yeah. Under FHA, for a foreclosure, you can purchase after three years and that’s three and a half percent down.
Under a Chapter 7 bankruptcy it’s two years. Under VA, it’s two years for a foreclosure, two years for a Chapter 7, one year for FHA and VA for a Chapter 13. You may want to explain to the audience what a Chapter 13 is versus a Chapter 7.
Sure. To parse that out, usually … and there’s different qualifications to both chapters. The very abbreviated version is Chapter 7 is what we call the liquidation, which basically means you’re filing the paperwork and your debts are just wiped out. Usually, that process is around, give or take, four months from when the case is filed until you get your discharge, which is a court order wiping out the debts. Whereas Chapter 13 is a payment plan from bankruptcy. It’s similar to debt consolidation in that you’re taking all of your debts and putting them into one payment.
The difference is that you have the supervision of the federal court system, everything is above board. That’s not to say that there’s anything illegal in debt consolidation, but there’s some more supervised instruction system. Now, from a timeline perspective, the major difference is that a Chapter 13 payment plan lasts for three to five year period of time. You may know the answer to this, usually, my experience is that that one year period of time is from the end of the Chapter 13 payment plan.
It sounds like a longer waiting period from the discharge in Chapter 7, but of course, in Chapter 7 the process itself is much shorter.
Correct. Correct. Yes. You’re absolutely right. It’s one year after the payout period elapsed and it must be approved by a bankruptcy judge or the courts. Yes. Yeah. The good thing is that people can purchase after. We actually have programs that are day after foreclosure, but I don’t recommend that because the interest rate will be very high. I don’t recommend that, but there are programs out there like that.
Your commitment is to put folks into situations that make sense for them.
Not things that going to be so risky after a difficult event, that it might set them up for failure.
Yes. I like to educate and help people and answer questions, and help them to feel comfortable in their decision. That’s what sets me apart from others, is to actually do that.
Another common question we see, and this goes into the planning component, is for married individuals, sometimes there may be reasons why only one of them has to go through some sort of financial hardship. We may deliberately keep the other spouse out of whatever the situation may be to preserve their credit worthiness. Are there circumstances where they can use that planning to their benefit for mortgage qualification?
Yes. Whoever is on the loan is the credit score we’ll use. One spouse has a negative credit and the other one doesn’t and they have the income to support it, then we absolutely can do that. However, if both people go on a loan, whoever’s credit is on the loan then we can only use that income. I get a lot of questions. Can I use my husband’s income if he has negative credit or can I just use his income if he’s not on the loan? Can’t do that. We use the lower of the two scores is what we use, if there’s a husband and wife, or … it doesn’t have to be husband and wife.
It can be anybody that’s going to live in the house or not. That could be a co-borrower. Let’s say my husband filed bankruptcy and I want to buy a house and I’m fine, or I got married and my husband has a bankruptcy or foreclosure two years ago or something like that. I’m remarrying now or it’s I’m living with my significant other. Then that person can purchase and we don’t have to put the husband on there, but let’s say I don’t have enough income on my own without my husband. I can always have another borrower go on as a co-signer with me.
My mother, my sister, my brother, somebody like that. Then later on, once my husband actually has the credit score to support, I can always refinance and take them off. There’s always ways to … Again, that’s what we want to do. That’s our goal, is how do you get there? Because rents are almost … or actually are more sometimes than what mortgages are.
It’s really gotten out of hand for the rental market and there’s not a lot of them out there. You can purchase after. It just depends. Save your money. I would love to come up with a system that after a … I love that you’re doing this because after financial difficulty, people really don’t know what to do. It’s great that just save some money, set up a budget. I’ll be more than happy to help anybody do that. Make the plan for future.
Right. I guess just to recap on some of the fundamentals, broader picture. We talked about this lifeline. This is a situation that so many folks it’s more the rule than the exception where at some point in life, there’s a bump in the road. Now, usually when we are problem solving these issues, first, a lot of times the vision is, how do we get our life back on track? How do we get our life back to where it was before this particular issue came up? I think what’s important to keep in mind is that the basics are that it’s a two-tiered process.
First, you have to stop the bleeding. That’s going to mean different things in different situations. Like I said, that might mean negotiating with creditors. That might mean a variety of different circumstances, depending on what’s happening. In some instances that might be a bankruptcy, but first, you stop that bleeding so that you don’t have to worry about the lawsuit. You don’t have to worry about future collection. You don’t have to worry about liens on property that remain there because the judgment is outstanding.
You have to find a way of getting rid of the rubbish, or you can start to build on it. You need that firm foundation. Once you get there, it isn’t this infinite period of time to rebuild or be in a position where you can buy a home or whatever that vision is for you. You want to engage in some of these best practices of having controlled lending so that you can show a credit history of doing these positive things to rebuild on those credit reports.
I want to just drill into a couple of specifics in terms of level of preference.
Particularly with folks that are dealing with foreclosures, a lot of times when we’re problem-solving those, first, problem-solving falls into two major categories. Options that allow you to hold on to the house like a modification and options that allow you to get rid of the house and maybe mitigate some of the problems that come with that, like deficiency collection and stuff like that. Let’s break those up a little bit.
I guess most of the parsing out really falls into that second category of if there’s a situation where it makes more sense to get rid of the house. Usually, that can take a small handful of options. That can be a foreclosure with a waiver of deficiency or without a waiver of deficiency. Sometimes that can mean a short sale and sometimes that can mean deed in lieu.
Can you break those out a little bit?
Well, as far as the mortgage goes, so foreclosure, short sale, short sales and foreclosures are lumped together. You actually have … Modifications are fine. That’s okay. The biggest thing is on modifications, lenders were giving advice in the past that on a modification you had to be late. Well, they’ve changed that since the crash and they’ve actually changed the way. You don’t have to be late. You could actually modify, so depending on what your situation is, because some people it’s medical, it could be loss of job. Extenuating circumstance also makes a difference in the timeframe.
If they have a foreclosure and it was due to a medical situation, extenuating circumstance … Divorce is not an extenuating circumstance, but medical is or loss of job. You may be able to have a shorter timeframe for getting a mortgage. It’s all about explanation, how much the differences are, but as far as a short sale, foreclosure, deed in lieu, they’re lumped together is what they are in the guidelines, but it depends on the program.
Okay. Well, that’s an important takeaway that it sounds like buying for a mortgage after a difficult circumstance, there’s almost a degree of advocacy in there is what I’m hearing. Where if you are working with applying for a loan, and if you’re in a position where you can provide some context for that bump in the road, it sounds like even that can help with the qualification process.
Yeah. Keep anything that is involved in that situation. Let’s say the hospital bills or anything like that, that actually is the proof. Loss of job or something like that. That all can make a difference, but again, it depends on if … It doesn’t change your credit score, but because if you’re late on your mortgage for 12 months prior, then you have a foreclosure, it’s still going to be a negative credit score. Let’s say another 12 months, 18 months later, it won’t be because you’ve actually gotten rid of the home.
My biggest challenge is, and maybe you can answer this for me, is we have customers that come in that have foreclosed, that were foreclosed on five years ago and they just recently sold their home, the bank.
Oh, wow. Yeah. I think what’s been an interesting in being in this field for over a decade helping folks, particularly through the crash, I think one thing that we’ve seen on a large scale basis is that the banks frankly didn’t know what to do with so much property. They would stagger the way that they were taking some of the property on. They didn’t want too much property on their books at any given time. A lot of times we would see foreclosure sales that were canceled and rescheduled, sometimes over the course of a year plus. Sometimes over the course of several years.
That may unfortunately be to the detriment of the homeowner who, just like Diane is telling us about, without that property sale finalizing, there’s going to be some lag to the ability of the credit report or the credit score to finish the bleeding so it can start to improve. So-
Yeah. We use foreclosures that the filing date … So when it’s sold, so that’s part of the issue, is that we may have a customer has an excellent credit score, but then you do public records and you see a foreclosure and he’s like, “Wait a minute. I gave the keys up five years ago.” They just sold it like a year ago.
Wow. That’s incredible.
Yeah. It happens a lot. I thought maybe you could answer that.
Maybe you could fix that.
Yeah. Well, sometimes we can help to motivate the process to actually speed up. There are situations where we can help to move it along and sometimes that’s the desirable one. The other part of it is broader picture. Part of it’s getting the property sold, part of it’s that you do want someone who’s working out in a foreclosure, particularly if it was not preceded by a bankruptcy, you want to make sure that foreclosure is the end of that difficult journey. Because in some instances, if there is a balance that is still left owed after the property is sold.
Hypothetically, if you have a loan that’s worth 300,000, but its fair market value at the time of sale is 200,000, and then there’s still some ongoing risk there that the lender could continue to attempt to collect. Not only do we want to finalize that foreclosure process, we want to make sure that there are protections in place to minimize any future lis.
Mike, they should actually contact you before they actually go into foreclosure, correct? So that it can be properly done. Instead of just doing whatever the bank says, actually contact you when they get the lis pendens or when would they contact you?
Yeah. The lis pendens in particular is that time when the train is starting to take off. I think the key takeaway there is even if you don’t want the property, don’t take for granted that just letting things take its course is going to be the right way to go. You’re going to want to see closure there. Again, the key takeaway is, find that path towards closure so you can start building on solid ground.
Good. Yeah. That’s a good thing because most of the time, the ones that actually came up again in our business is that we’ve actually found that they didn’t have an attorney to represent them. They really didn’t know what to do. It’s a terrible time for the customer or for the homeowner because they don’t know what to do. They’re financially strapped. It’s a very emotional time and they didn’t know to contact and attorney. Yeah. That’s important.
I’ve worked with a lot of folks, unfortunately, usually a little later than they would prefer, who are doing their best to do things on their own and are doing things in good faith. They might have a line of communication with the lender and might feel like they’re making some sort of progress there. That’s not to say that the lender is deliberately trying to put anyone in a spot, but a lot of times it can almost be distracting because if you’re working with the bank and trying to work out some resolution.
A lot of times, there’s not a good stream of communication with the bank’s attorneys for continuing to move the foreclosure forward. Then sometimes folks are surprised by a sell date that’s come out to them without being fully aware of it.
Right. That’s important. Good.
Diane, if folks have questions about loan qualification, if they want to reach out to you and where and about what they can do on a personal level to start planning ahead for credit repair, start putting themselves in a position where they can best qualify for mortgage with reasonable terms, what would be the approach to do that?
I will give you my cell phone number. It’s (727) 647-8199. I have a website. That’s my name, dianevance.com. It’s D-I-A-N-E V as in Victor, A-N-C-E.com. It has some information on there about credit and it also has how to contact me, my email address, and a lot of blogs on there. There’s a lot of credit blogs on there as well. You absolutely can contact me and I’ll be more than happy to go over any questions that you have or any situations. People are always concerned about judgment. Now, I don’t have any judgment because, like I said, bad things happen to good people.
My family, my sister had some issues and it is just what it is. People need help and need to understand that it’s okay. Don’t be afraid that … And we will get you there eventually. It just may not be tomorrow or it may be, but I can give you a timeframe.
Great. I’m going to end with a quick plug. If you have reviewed your credit report, if you see there’s information on there that’s erroneous and I do want to distinct an error on a credit report, not just something that you wish wasn’t there. If it’s purely inaccurate, or if you have a creditor who’s reporting that you have a balance even though you discharged that balance, that is something that my office can help with.
In some instances, if the situation’s appropriate, then we’ll handle a claim under the Fair Credit Reporting Act. Our contact information, our website is the zieglerlawoffice.com, which is Z-I-E-G-L-E-R lawoffice.com. You can reach us at (727) 538-4188.
I’m going to give you the annual credit report so they can view their credit report. I’m going to give you the online and the phone number. It’s annualcreditreport.com, where you can actually get your credit report. Then the phone number is (877) 322-8228. I would like to thank everybody for joining us today and we would love your feedback. I see we have a question here.
Yeah. A chat.
… some links to those-
Oh, okay. Sarah.
… those websites.
Oh, there you go. Thank you, Sarah. You are awesome.
We didn’t think about that, did we?
All right, guys. Well, thank you, and thank for joining us and have a great day. Okay. Stop recording.
Call Now for a Free Case Evaluation
Clearwater: (727) 538-4188 | Tampa: (813) 225-3111