Will my credit score improve 2 years after my chapter 7 bankruptcy?
March 18, 2013 2:07 PM   Subscribe

My wife and I declared bankruptcy 22 months ago. It was the only way, and we have no regrets whatsoever. We managed to keep our house and what little equity we had. We are looking to move to a different house, and are curious about our mortgage options. My credit score today was 681, which is just on the edge of where (so I read) you can get a conventional mortgage. In two months, when we get past the two year mark on our bankruptcy, will the score go up appreciably, or is it a gradual thing?

Any other general advice for our situation?

If any of it matters: we have plenty of income, zero debt other than student loan, car loan and mortgage. We have several credit cards that are empty but that we put things on from time to time and pay them off. We have about 18k in savings, and around that in equity. We have nothing but green in our credit report since the bankruptcy, and even through the bankruptcy we were never late with a payment to car or house.This is in Texas.
posted by anonymous to Work & Money (4 answers total) 2 users marked this as a favorite
Chapter 7 bankruptcies remain on the credit report, according to Experian, 10 years.

But that's not the total story. Credit Agencies get to do what they want and your credit score is figured by them using proprietary and secret formulas. But my general experience, talking to clients, is that bankruptcies stop being taken as too serious dings against credit about 2 years after the bankruptcies.

What that translates to as far as your actual score, no one can really tell you except people who work in the agencies and they're not talking.
posted by bswinburn at 2:19 PM on March 18, 2013

Any other general advice for our situation?

Have the conditions that led you to bankruptcy actually changed for you? For instance, if you had significant unmanageable medical expenses, have those been eliminated by bankruptcy and your condition solved? If your income was insufficient for your expenses, have your expenses decreased or income increased?

I don't want to make a generalization that is inappropriate to your situation. However, I will note that quite often when I see people racing from bankruptcy to obtain more debt (which is what a mortgage is), I see the same people in the same situation that resulted in the bankruptcy several years later.

I think the more appropriate question is not "is my credit situation sufficient for a bank to offer me a mortgage?" but "are my finances sufficient for me to pay back a mortgage with all reasonable eventualities covered?" You know your own finances better than a bank does. If you can answer the latter as "yes", the former question tends to be "yes". However, the converse does not hold - a credit score alone in no way means it's a good idea for you to look for a mortgage.
posted by saeculorum at 2:42 PM on March 18, 2013 [8 favorites]

In general, your credit score improves the day after your Chapter 7 discharge is final. Why? You can't file a Chapter 7 for another 7 years and there will be a very hard road ahead of you if you want to file a Chapter 13. It means you're a "better" risk because you can't do bankruptcy again for awhile.

Two years is the lower limit for getting a new FHA-insured mortgage. Virtually every mortgage written these days is FHA or VA insured. For most lenders, your median credit score (calculated in a slightly different way than your FICO score, and not usually available for purchase by a consumer) must be an absolute minimum of 620 and should be above 680. If all three of your reports aren't showing at least a 670, you probably won't qualify. You will also be writing at least one letter of "I'm very sorry, I messed up, I feel bad, and here's how I promise to be a really good consumer" to some underwriters. They want you to write out your sob story and do a little bowing and scraping. Why you filed bankruptcy will be important and they'll want to know.

Since you're in Texas, does your existing property have a HELOC (home equity line of credit) against it and/or is your existing mortgage a home equity loan? If either is true, you have some more paperwork to do and may need a higher credit score. The logic for banks goes: if you took out a home equity loan before, you might do it again, and then the housing market might bust a second time and nobodywantsthatdowe?

Oh, and, if you can, get a loan from a credit union or bank that will hold the note. You can often times meet with the underwriter or his or her assistant in the process, if needed, and smooth over any bumps from the bankruptcy.

All information here based on buying/selling property in Texas. Your mileage may vary. I'm not a lawyer, REALTOR™, or even staying at a Holiday Inn Express. Operators are standing by. Offer void in Idaho or some such place
posted by fireoyster at 8:44 PM on March 18, 2013 [1 favorite]

we have plenty of income, zero debt other than student loan, car loan and mortgage.

That is not zero debt. In fact, those are the three largest debts a family typically carries. Do you have a family financial plan? Do you have a good sense of how much debt you can safely manage? There is certainly good debt, and those three types mostly fit the bill (with the possible exception of car loan, YMMV). But maybe that's all the debt you should be carrying? It's really an open question as to whether owning & carrying a mortgage is better financially then just renting. But maybe the value of your house is depressed right now and the mortgage is underwater so it's not really worth debating. In case it's helpful, here's a rent vs. buy calculator.

If you're in reasonably good shape with your current debt levels, and your financial situation is improving with every passing month, ask yourself if you really need more debt right now. Can you survive by just saving to pay for whatever you're thinking of using the debt for further down the road?
posted by dry white toast at 7:44 AM on March 19, 2013 [1 favorite]

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