Bankruptcy Doesn’t Close Door on Home Loan

After his investments went sour, the attorney went bankrupt and had to give up his $700,000 contemporary home. But just months after walking away from the federal courthouse, he moved to another luxury property in a nice suburb.

The story of the attorney, related by a lender, is but one sign mortgage lenders are taking a more lenient approach to those who have gone bankrupt. As bankruptcies increase and the stigma lessens, minds are opening on the issue.

“If you’ve gone bankrupt and have been hiding away in shame, come out and talk to the representative of a good mortgage lending institution. Chances are you’ll come away with your head held up high,” said Steven Marshall, an executive of PaineWebber Mortgage Finance Inc.

Lenders know that many are forced into bankruptcy for reasons beyond their control. Bad economic times have meant layoffs for thousands. And more Americans are being forced into bankruptcy because of shrinking health care coverage.

“The big thing is that people shouldn’t be afraid of asking for a mortgage after going bankrupt, as long as the bankruptcy was for a legitimate reason,” Marshall said.

Contrary to popular belief, those who have gone through bankruptcy are not barred indefinitely from getting a mortgage after discharging their debts. There are no set limits on how soon you can get a conventional mortgage.

Granted, some lenders refuse to make a mortgage to anyone with a bankruptcy in his past. But these days many will lend within just two years of bankruptcy. An occasional lender will let you have a mortgage even sooner--especially if you have a big professional salary or couldn’t help going bankrupt.

“If the situation causing bankruptcy was totally beyond the person’s control, it’s possible to get a mortgage in even less than two years,” said Claude Mascari, executive vice president of Atlantic Home Mortgage. He remembers a police officer who quickly got a mortgage after a bankruptcy related to an on-the-job motorcycle accident.

Government agencies that insure loans require relatively short waiting periods. The Federal Housing Administration requires that a bankruptcy be discharged for at least one year; the Veterans Administration insists on a two-year wait.

Many a bankrupt person who cannot qualify for a credit card can still get a home loan. The difference is that credit card debt has no security behind it. But an institution that makes mortgages knows it can take your property.

Remember, though, that a lender making a mortgage to someone with a history of bankruptcy is likely to ask for the comfort of a big down payment--often in the 20% range. The lender also wants a clean credit record for the post-bankruptcy period.

“Once somebody claims bankruptcy and then shows a spotty credit history after the bankruptcy, his chances of receiving a mortgage are much less than someone with the spotty history who hasn’t claimed bankruptcy,” says Marshall of PaineWebber.

If you have a bankruptcy in your background and want to apply for a home loan, mortgage specialists offer these pointers:

* Never lie about a bankruptcy on your mortgage application.

A bankruptcy will show up on your credit reports for seven to 10 years. Lying about it shows such bad character as to be grounds for rejection, Marshall said.

* Never convey a casual attitude about your bankruptcy. Instead, show an attitude of remorse.

“We get a lot of people who apply for mortgages and are very nonchalant about having gone through bankruptcy in the past,” Marshall said. Lenders need to be convinced that your attitude toward debt has changed so you won’t repeat bad financial habits.

* Offer a full, written explanation of the situation leading up to your bankruptcy.

Your loan officer will be looking for a detailed chronology explaining just what happened--such as circumstances related to a job loss, medical bills or business problems. The idea is to convey that the bankruptcy was involuntary and not simply an opportunistic attempt to unload obligations.

If the bankruptcy was related to a separation or divorce that left you with excessive debt, try to show that you went out of your way to meet your obligations, by taking a second job, for example. Also describe any extraordinary efforts made to communicate with your creditors to restructure debts before bankruptcy.

* Bring documents to your lender’s office that show good faith-efforts to pay your bills.

Bring the names and phone numbers of creditors or collection agencies with whom you dealt in the pre-bankruptcy period. Bring canceled checks showing how you made at least partial payments to them. Also bring the names, addresses and phone numbers of those who can verify your story about why the bankruptcy was necessary.

* Establish good bill-paying practices and re-establish your credit soon after your bankruptcy.

“Many people who have gone through bankruptcy have impeccable credit and even pay for things in advance. They’ve lived through the stressful situation and they don’t want it to happen again. For the most part, they are very good credit risks,” Marshall said. The exceptions, he says, are spendthrifts who go into bankruptcy solely because they have lived beyond their means.

To prove to a mortgage lender that you’re a good bet, you have to be as pure as snow in the post-bankruptcy period. Ideally, you’ll be able to obtain a line of credit or two, perhaps from a local department store or community retailer. Remember, you don’t have to run up big credit bills to show you know how to handle debt. Just charge an inexpensive item and then cover the charge immediately.

Even if credit is out of your reach, you can show good habits by documenting prompt payments of your routine bills--such as rent, telephone, gas, electric, water or cable TV bills.

Don’t give up because one lender rejects your application.

Lending institutions have widely varying policies on how they handle people who have been through a bankruptcy.

“We’re looking for an individual who will pay his debt without having to be hounded down. Finding that individual is an art, not a science,” Marshall said.

Distributed by the Los Angeles Times-Washington Post News Service .