Sound Mortgage Planning Blog

A bankruptcy filing delivers a devastating blow to your credit and FICO score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage. Many consumers who have filed for bankruptcy have been able to obtain a mortgage, although it is often at a higher rate than someone qualifying for a prime or "A-paper" loan.

While credit card companies may care about what happened before you filed for bankruptcy, many mortgage lenders are more interested in your recovery — what you’ve done since your filing. It won’t happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:

Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy and he or she will likely want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”

If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice or death certificate. You may also want to bring in court documents to indicate when the bankruptcy was filed.

Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. You won't turn things around in a year but your credit score will improve over time.

Dispute any credit report errors. There’s no need to add to your troubled credit history with errors on your credit report. Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the CRA in writing what information you believe to be inaccurate and request deletion or correction.

Save your money. Lenders may be more willing to loan you money if you’ve saved up a considerable amount of money for a down payment.

Live within your means. Even subprime lenders won’t risk loaning you money for an opulent oceanfront mansion. Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.

What does this actually mean?

The Federal Reserve Board and Mr. Bernanke control the Federal Funds Rate. If the Fed is concerned about inflation, they may attempt to cool the economy by raising the Fed funds rate. If the Fed sees that the economy has slowed, they may then lower the federal funds rate in order to stimulate the economy. This in turn influences the market for shorter term securities like the prime rate and any kind of T-Bill rates of less than 5-years.

So what causes high or low interest rates?

Virtually every bank mirrors the Fed with the prime rate they publish. Keep in mind that the prime rate is currently 3% higher than the Fed Funds Rate. So, if the Fed lowers the current Fed Rate of 4.5% down to 4.25%, the prime rate will become 7.25%. If you will remember, one year ago the Fed Funds rate was at 5.25% which translated to a prime rate of 8.25%. The market was still doing very well at that time and therefore the Fed responded with a higher Fed Funds Rate in order to cool the economy. Most second mortgages are based on the prime rate, so as it fluctuates so does the cost of credit to homebuyers. By the way, this also affects your credit cards since they too follow the Fed when they move rates.

Okay, so how does this affect long term rates?

The Fed Funds Rate does not have as direct an affect on long term rates. However, the market has a mind of its own and if it feels the Fed is not being diligent against inflation then rate could rise. The intent is to help stimulate the economy, which in turn may lead to inflation. This is a good indicator as to why interest rates for 30-year fixed rate mortgages have remained stable even though the Feds, until recently (August), had raised the Fed Funds Rate 17 consecutive times over the previous two years. Another side note: the average rate for 30-year fixed rate mortgage in October of 2006 was 6.36%. The average rate for October 2007 is 6.38%. While long term rates will generally move the opposite way the Fed moves the rate or at least moves less dramatically, long term rates have remained stable.

Are there other contributing factors that affect long term rates?

Yes, there are multiple economic factors that cause mortgage rates to rise and fall, contrasting economic reports on stock and bond behavior in the stock market, consumer confidence, unemployment rates, and so on.

In closing…

There are numerous factors that affect the direction interest rates will take. While individually they have only a minor affect, collectively they determine what the rate will be. The media plays a big part in consumer confidence and this too has had an affect. Take a look at any newspaper or watch any news program and you will read or hear about the state of the real estate market.

By the way…

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Luckily I have found a great website that does exactly what I wanted it to do.

Please take some time to look through the website and please provide feedback regarding the website and blog. Let me know what you think.

Take care,

Shawn