Question: I have a question about credit scores. We recently filed for Chapter 7 bankruptcy and I'm wondering when we can start over and buy a new home. What will the bankruptcy do to my credit score? I've heard that there are lenders who make loans one day after the bankruptcy is final. Is this true? Thanks for any information you can provide.

Answer: There are literally thousands of "alternative" lending sources in America. Also know as "B-C-D" lenders, these guys provide mortgage financing for folks who can't qualify for conventional mortgages. The catch? Be prepared to pay through the nose - high rates and high fees.

Let me first try to answer your questions. A credit score is a comprehensive evaluation of credit risk. The higher the score, the better the overall credit. So yes, you can expect your credit score to drop significantly as a result of the bankruptcy.

I suppose there are some lenders who will make mortgage loans to folks with a bankruptcy not yet discharged. I receive solicitations almost daily from alternative lenders looking for business. There are two things I can tell you.

First, as I said, expect to pay a high rate and high fees. Your credit history suggests that you are a high risk to the lender. The lender will be compensated for absorbing this risk by charging you big time. Depending upon the down payment and the severity of your credit problems, expect to pay between nine and 15 percent.

Second, alternative mortgage programs have very specific underwriting criteria. Your loan will either be approved or rejected - not because the underwriter liked or disliked the file - but because you loan application did or did not fit the program requirements.

For example, one loan program may require at least 20 percent down, credit scores of 580 or more, and no late payments on your rental history for the last 12 months. Another loan program may have the same requirements but will allow a credit score to 560. Think of each loan program as a mold. Your loan application must fit into that mold for it to be approved.

So, having said that, the best way to determine whether or not you are eligible for mortgage financing is to consult with a good mortgage broker who is experienced in these matters. He can than collect your data, ascertain the parameters and then shop around for alternative programs that will accept your application.

A word of caution - don't be surprised if you have trouble, especially if you don't have a big down payment. Seeking out a mortgage immediately after filing for bankruptcy won't go over real well in the lending world. Even the "B-C-D" folks will have trouble with it.

One more thing: Whether you ending up buying a house or renting for a while, make sure your housing costs are affordable. You will need some time to repair your credit and begin anew. This means paying your debts timely and stashing away a bit of dough every month.

Published: May 29, 2002

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