Bankruptcy- Credit Scoring Explained
Before you make any decision, you need to consider your options. Is your bankruptcy something that could be paid off with a tax return check? If the anwser is yes, you may not want to refinance unless your terms are still better than your current mortgage. Is your mortgage an ARM or fixed rate? What is your current interest rate? (if it is fixed) length of time you plan on staying in the property. You never want to strip equity from your home just because you want a bankruptcy behind you. Most loan officers wont tell you the truth because they dont know or understand what it is they are selling you. A subprime 2/28 is the standard for rebuilding credit.
The 2/28 or 3/1, 5/1 30yr will over time help your credit because you will have a mortgage reporting on your credit report again. Often times what happens is when an automatic stay is placed on your debts, the mortgage company stops reporting or reports in your collection account area. Collection accounts do not give you a benificial remark. Even when your bankruptcy is paid off, your previously defaulted mortgage will remain in your collection accounts. The older the derogatory info is, the less weight it will carry on your score. Payment history is only 35% of how your FICO is calculated. Since a public record is on your credit report your graded on a considerable curve. Similar to college, when everyone in the class or the majority did poorly on an exam, the teacher may grade a 40% as a C .In comparison to the rest of the class, you did average . Fair Issac has adopted the same kind of model in determing a score for a group of individuals that have had a public record on their credit report. The good things you do when graded in this pool will signifigantly increase your credit score. On the flipside of the equation, should you miss a payment from after post petition refinancing is approved, your score will be more adversely affected than the rest of the consumer base. The average fico in the US is a 720. It is very attainable to have a 720 6 months to 1yr out of bankruptcy. The most important part of rebuilding credit is establishing revolving trade line of 500-1500 limits. Applying for multiple credit cards is NOT what you want to do.
Many times when a chapter 13 is paid off, all debts are paid off completely. If you have revolving charge cards that were not in your credit matrix when you filed bankruptcy, keep them open with low balances. Often times borrowers will do debt consolidation loans, payoff their debts completely and think that they just helped their credit. You did not help your credit. You hurt your credit. A mortgage is different when paid off, because it will always be replaced by another mortgage tradeline when refinancing.Establishing credit by means of secured credit cards, is the fastest way towards building a healthy credit score. For information on chapter 13 loans or credit rehab please contact the author.
Shawn M Peck is a active mortgage educator/Loan officer. Mr Peck’s funding ratio for chapter 13 loans submitted is 97.64% Mr. Peck is a Rowan University Alumni and is located in Cherry Hill NJ.
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