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ALTERNATIVE CREDIT

FHA and Fannie Mae accept “alternative” credit. Alternative credit accounts are accounts that are paid each month yet don't qualify as installment or revolving accounts, such as an automobile loan or a credit card.

Alternative credit accounts are utility bills such as a telephone, cable, water, or electricity. Lenders can accept these types of accounts and still approve your loan if you can document that you have paid these accounts on their due dates for the previous 12 months.

This means getting statements from your phone or cable company showing timely payments.

For lenders to use alternative credit, the accounts must be entered onto the credit report itself in addition to simply providing the documentation of timely payment.

Alternative credit is a viable, albeit time-consuming, method of getting approved for a loan. When you check your credit report and you don't have three consumer trade lines, if s possible your lender can accept alternative credit.

BANKRUPTCIES AND CREDIT

Sometimes an event happens that is so damaging to the consumer that there appears no way out. Bankruptcy laws were established many years ago to give people a fresh start.

There are two types of bankruptcies: Chapter 13 and Chapter 7. Chapter 13 is sometimes called the Wage Earner plan because the credit accounts aren't completely wiped away but paid for, bit by bit, out of the consumer's wages each pay period.

A judge will review a person's application for a Chapter 13 filing, then determine which creditors will get paid how much. Certain things such as property and income taxes and spousal and child support can't be included in a Chapter 13 bankruptcy.

Chapter 13 bankruptcies can take up to five years for creditors to be repaid. Once the repayment period has expired, the Chapter 13 is considered “discharged.”

A Chapter 7 wipes out all previous dischargeable debt in one fell swoop. After all the bankruptcy filing has been signed by the judge and recorded, the Chapter 7 bankruptcy is also discharged.

Consumers must pass an income “litmus” test to see if they can qualify for the Chapter 7 discharge. To qualify for Chapter 7 the consumer must make no more than the median income for the area. Income is calculated by using the previous six months worth of total monthly income. If the consumer makes more than the median income for the area, he may not file for a Chapter 7 bankruptcy, but only for a Chapter 13.

The interesting thing about the different types of bankruptcy is how lenders view the discharge date.

A bankruptcy can appear on a credit report for seven years or more, but many don't know that you can still get a mortgage with a bankruptcy showing on a credit report. Conventional and government loans simply ask that the discharge date be at least two years old.

That means that if two years have passed since the discharge date, a lender will consider your mortgage application as long as you have reestablished credit with a minimum of three separate trade lines — regardless of the bankruptcy showing up on a credit report.

But the twist is that a Chapter 13 can be discharged only after the repayment period has elapsed. If you have a three-year repayment plan, then you may have to wait another two years for the Chapter 13 to be discharged.

Some lenders have adopted a nicer stance and review the actual filing date of the Chapter 13 instead of requiring that the Chapter 13 be discharged. If you've got either type of bankruptcy in your history and are exploring conventional financing, make sure you tell your loan officer at the very beginning.

Good news though, again, regarding FHA loans and bankruptcies: An FHA loan allows consumers to obtain a mortgage loan while still in a Chapter 13 repayment plan. As long as the loan gets a credit approval and meets the minimum credit score requirements, an FHA loan may be the way to go.

You will need to get the court's permission to buy a condo, co-op, or townhouse. The court may want to know why you're buying real estate instead of paying back your creditors. But I've never heard of a court denying such a request as long as the consumer has made timely Chapter 13 payments. That, too, is an FHA lender's requirement: You must be able to show that all of the Chapter 13 payments have been made on time.

 
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