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After bankruptcy, you can still get a home mortgage


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

The story of the Virginia lawyer, related by a lender, is but one indication that mortgage lenders are taking a more lenient attitude toward people with bankruptcy in their backgrounds. As bankruptcies increase and the stigma lessens, more lenders are opening their minds 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," says Steven Marshall, Severna Park branch manager for PaineWebber Mortgage Finance Inc., the Columbia-based mortgage banking firm.

Lenders know that many people are forced into bankruptcy by circumstances beyond their control. Bad economic times have triggered layoffs for thousands who later found new jobs and were able to buy homes. And, as Mr. Marshall points out, an increasing number of Americans are forced into bankruptcy due to shrinking health care coverage combined with a medical emergency.

"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," Mr. Marshall says.

Contrary to popular belief, there are few hard-as-concrete rules that make you wait for a long period to get a mortgage after a


There are no set limits on how soon you could obtain a conventional mortgage after bankruptcy. Some lenders still refuse to make a mortgage to anyone with a bankruptcy in their past. But these days an increasing number of home loans are being made to those with a bankruptcy just two years behind them. And an occasional lender will require that even less time pass -- assuming you have a big professional income and stable employment prospects.

"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," says Claude Mascari, executive vice president of Atlantic Home Mortgage in Towson.

Government agencies that insure loans, meanwhile, may require post-bankruptcy waiting period. The Federal Housing Administration (FHA) requires that a bankruptcy be discharged for at least one year; the Veterans Administration (VA) insists on a two-year wait.

Many a bankrupt person who can't qualify for a credit card can still get a home loan. The difference is that credit card debt has no security behind it. On the other hand, the institution that lends money for a home knows it can recover the property even if your financial problems recur.

But remember 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 -- usually in the 20 percent range. The lender also is going to insist on seeing 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 Mr. Marshall of PaineWebber Mortgage.

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

L * Never lie about a bankruptcy on your mortgage application.

A bankruptcy will show up on your credit reports for seven to 10 years. Your lender is virtually certain to discover the fact of your bankruptcy, anyway, and lying about the fact shows such bad character as to be grounds for rejection, Mr. Marshall says.

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

Your lender will be listening closely for an acknowledgment that, although you made financial errors in the past, you've changed your ways. It's not that lenders are trying to play the role of moralists. Rather, they need to be convinced that your attitude toward debt has changed and that 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 your obligations.

If your 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 your 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. That'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," says Mr. Marshall.

To prove to a mortgage lender that you're a good bet, you have to be 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 purchase a small item or two 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.

L * 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.

Just because one lender turned you down doesn't mean others will also, Mr. Marshall says.

"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," he says.

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