Thursday’s Thoughts – Is your credit grounded?

If you’ve recently filed bankruptcy, had a foreclosure or sold your home as a “short sale” then your credit may currently be grounded.  What do we mean by grounded?  Well think of it this way.  When a child is grounded their options are limited and the freedom they had before is temporarily removed.  When your credit is impacted by a bankruptcy, foreclosure or short sale,  your future financial options are limited as well.

Mortgage guidelines are constantly changing and there may be exceptions to the rule but here are a few general guidelines if you’re thinking about buying a home and applying for a mortgage.

Chapter 7 Bankruptcy: Typically you need to wait two years after the discharge date.  The two year clock starts at the discharge date, not the filing date.  If you file for bankruptcy in August it may not be completed, or discharged for several months after that.

Chapter 13 Bankruptcy: On a Chapter 13 Bankruptcy you are agreeing to pay back some or all of your debts and you won’t be eligible for a mortgage until two years after you’ve paid off at least half the balance or until you’ve made at least two years worth of payments on your payment plan.

Foreclosure: A foreclosure is when the bank seizes your home to sell it and recoup on the unpaid mortgage loan.  On most loans you will need to wait three years from the finalized foreclosure date.  This will not be based on the date in which you moved out of the home but likely the date in which the lender was able to sell the home and close the foreclosure process.  Veterans or VA loans will allow this after two years instead of three.

Short Sale: A short sale is when the bank allows you to sell your home for less than you currently owe on the mortgage.  Lenders will view this identical to a foreclosure.  If you have a short sale on your home you will typically have to wait three years from the closing date.

Hopefully you’re able to avoid going through any of these scenarios.  If you do,  just understand how this will affect your ability to buy another home afterwards.  Just waiting out the two to threes years won’t be enough.  You may have to clean up a few discrepancies on your credit report as well.  Be sure to pay your housing expense on time every month and avoid any late payments after a bankruptcy, foreclosure or short sale.  Don’t worry, you won’t be banned for life, just grounded for a bit!