Proving you're creditworthy after emerging from Bankruptcy (WSJ)

{ Posted on 11:37 AM by JR Erickson }

Q: I'm applying for a mortgage after going through Chapter 13 bankruptcy four years ago. All my debts were satisfied over a year ago. The lender asked for a letter of explanation regarding the bankruptcy, and I supplied one. Now they want more detail. I've been extremely careful with finances since the bankruptcy. How can I prove myself creditworthy?

--Greensboro, N.C.

A: Despite today's tight credit market, you have already proven yourself creditworthy and should qualify for a mortgage, according to several Greensboro lenders and mortgage brokers.

But you should expect to pay a bit higher interest rate than someone who hasn't been through bankruptcy--perhaps a quarter percent more than the market rate, according to David Gulledge, senior vice president of Cunningham and Company, an independent mortgage banker. You'll also need to document the circumstances surrounding your bankruptcy in detail, as well as your attempts to re-establish your credit.

For instance, if you declared bankruptcy because of illness, you'll need to show doctor bills, as well as proof that you are now better and able to work. If you got in financial trouble while you were married and were jointly responsible for expenses--and are now separated or divorced and no longer liable for them-- you will have to show the legal papers that prove this. If you lost your job, you'll need proof, such as tax records, that you have been steadily employed for at least a year since the bankruptcy.

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Lenders will, of course, check your credit score to see if you have been paying your bills on time since the bankruptcy; be sure to look at it yourself to make sure that information from all your creditors has been reported accurately, and also that all of your creditors have been listed. You're entitled to check your score from the three major reporting agencies, TransUnion, Equifax and Experian, at least once for free every 12 months at

Kerrie Currie, senior loan officer at WR Starkey Mortgage, says you'll need a credit score of at least 620 to be considered for a loan. She adds that to meet underwriting guidelines set by Fannie Mae and Freddie Mac, you must be two years from the discharge date of your bankruptcy or four years from dismissal for a conventional loan. The Federal Housing Administration (FHA) requirements are looser: You need to pay all of your bills on time for a year after declaring bankruptcy. You can also boost your standing with the lender, as well as your credit score, by establishing new accounts and keeping them current, she says.

But understand that even if you fulfill all these mandates, a loan isn't guaranteed. According to mortgage and financial planner John Shaw, some cautious lenders are overlaying their much more stringent guidelines on top of FHA's more lenient ones, even if you've applied for an FHA loan.

Since lenders are likely to remain nervous for some time, I think your best bet is to remain co-operative. Supply whatever information you're asked for to prove you're a good risk. But never forget that you're a customer, and entitled to answers yourself, such as why the information requested is needed, and how long you should expect to wait for loan approval. If you aren't satisfied with the answers, take your business elsewhere.

Posted via email from Jeremy R Erickson

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