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Archive for Friday, August 4, 2006

Previous bankruptcy can boost loan rate

August 4, 2006

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Q: My credit is good, but the woman I married earlier this year filed for bankruptcy in 2002. We would now like to buy our first home together. How will the bankruptcy that she filed four years ago affect our chances of getting a mortgage loan? Would it be better to apply for the loan in my name only so that her bankruptcy won't have to be listed on our loan application?

A: Though filing for bankruptcy usually puts a huge black mark on an individual's credit record that takes years to erase, it typically doesn't prevent him or her from getting a mortgage - especially (like in this case) if the bankruptcy was filed more than one or two years ago.

Maybe it's just a sad "sign of the times," but I get bankruptcy-related questions like yours several times each month. I cannot respond to all of them because this column is about real estate, not bankruptcies or bankruptcy law.

While many lenders are willing to issue mortgages to people with a bankruptcy on their credit record, they often charge a higher interest rate or fees to compensate for the extra risk.

Contact a few loan brokers and banks to ask how the previous bankruptcy would affect the loan terms that you and your new wife would be offered. Also ask for two separate quotes: One for the rate and terms that you would get if you applied for the mortgage by yourself, and the other for the terms you and your wife would get if you applied jointly.

If the terms are identical, the two of you could apply for the mortgage together and then take title to the property jointly when the deal closes - provided your spouse's bankruptcy case has been completely settled and her former creditors can no longer place a lien on any property she owns to collect their unpaid debts.

Conversely, if you would get a better loan deal by applying in your (bankruptcy-free) name only, you could file the mortgage application yourself, take title to the home as "sole owner," and then add your wife's name to the title later.

Bankruptcy laws and real estate laws are complicated, so it's important that both you and your new spouse consult with a good attorney before taking title to your new home.

- David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor's Business Daily.

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