You thought it only happened to others. That it was just reserved for those fiscally irresponsible enough to get themselves in trouble in the first place. First you get one credit card, then another, then another. Then you only pay minimum balances, then transfer balances, then....you're downsized. Or you're sick and can't work. Or something happened to you in such a financially-catastrophic manner that you too, filed for bankruptcy. What's worse, the perfect home you've been keeping your eye on is finally, finally for sale. But you're out of luck because you have a bankruptcy. Right?

Not really. It used to be that if you had a bankruptcy in your past you could pretty much forget about obtaining a mortgage. In fact, it was thought that you couldn't get one at all until ten years had passed since your discharge...ten years! Well forget about that, here's a road map that can help if you've had a bankruptcy in your recent past.

A "Chapter 7" essentially wipes out all your old debts (those allowed by statute) while a "Chapter 13" works out a payment arrangement with your creditors where you pay everyone back an agreed upon sum over time.

What's interesting is that many lenders treat both filings the same way. Under a Chapter 13, a lender still wants to see some time elapse since the discharge just as if you wiped away all your debts under Chapter 7. To most lenders this time frame is anywhere from two to four years.

Yes, there are lenders who will lend while you're still making Chapter 13 payments, but the trustee assigned to handle your case will want to know why you're using money to buy a new home instead of paying off your old bills. I'm not saying it doesn't happen, it's just not all that common. Further, many lenders who place a mortgage under such circumstances may not be prepared to offer their most competitive product.

Under either filing, not only will a lender want to see some time elapse between buying a new home and obtaining a new mortgage, but the lender also wants to see some new credit established. Yep, that's right. New credit. The same thing that got you in trouble in the first place, right?

But the lender wants to see if you have been able to manage your money effectively and can handle credit accounts again in a responsible manner. At minimum, most loans require you have three new, established credit accounts where you have purchase something on credit and paid them back on time, every time, for at least two years. This is in addition to any rent payments you might have made to your landlord.

Re-establishing credit is extremely important if your goal is to obtain a mortgage. If you've had a bankruptcy discharge and are simply waiting around for time to pass you'll find that's not enough. Lenders want to see a pattern of fiscal fitness emerge over an extended period before granting new mortgages.

If you've had a bankruptcy discharge and want to apply for a mortgage with competitive rates and terms, you'll need to put some time between your bankruptcy and loan application while at the same time re-establishing a credit history. One will need both, not just one, of these to happen.

For more articles by David Reed, please press here.

Published: June 22, 2001

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.