6-year-old bankruptcy shouldn't bar loan


April 15, 2001

Recently, people with poor credit histories have asked how they can get a loan to buy a home or refinance an existing mortgage.

A couple who went through bankruptcy six years ago, asks, "Do we have a chance to buy a home or should we wait until the bankruptcy clears from our credit report?"

A 6-year-old bankruptcy should not prevent a borrower from obtaining home financing.

Under guidelines for Federal Housing Administration-insured home loans, a bankruptcy that occurred more than two years before loan application is not considered when applying for a loan.

Borrowers who seek conventional financing usually will not be adversely affected by a bankruptcy more than 4 years old. Of course, other credit factors, relating to income, debt, payment history, and value of collateral will weigh heavily on the lenders' decisions to approve mortgage loans.

A wife reports she and her husband "are on Social Security and struggle to meet our mortgage payments."

They admit that their credit history is poor, and have lots of late payments. Nevertheless, the couple is "desperately trying" to refinance their $1,126 per month adjustable-rate mortgage.

"I get phone calls about refinancing from mortgage companies every month," the wife said in her letter.

"I give them all the information they ask for, but they never call back, or I get denied." The couple is afraid they'll lose their home unless they can "get relief from this huge monthly payment."

Unfortunately, this couple's bad credit history and limited income make it extremely difficult for them to obtain favorable financing. People with poor credit pay higher interest rates and more points than applicants with good credit. The mortgage companies that solicited this couple obviously lost interest once they looked at the couple's credit report and limited income. This is a discouraging sign.

Perhaps a credit counselor can assist this couple to improve their credit standing by restructuring their debts or taking other steps to improve cash flow.

If their credit is beyond repair, the couple must seriously consider selling their home and finding a less expensive place to live.

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