While credit scoring certainly has its flaws and inequities, the good news is that a consumer's credit history will heal itself over time. Even consumers who have experienced a bankruptcy or a foreclosure, two of the most significant derogatory credit events, will one day be able to join those consumers who enjoy the privilege of being granted credit.

After a bankruptcy, a prospective borrower must be diligent about establishing new credit and making all payments on time. FHA and conventional financing have different timeframes and slightly different rules. FHA will allow a borrower to buy a home after one year of the payout period of a Chapter 13 bankruptcy but conventional loans (Freddie Mac and Fannie Mae) will require a two year period after discharge date. Timeframes for a Chapter 7 bankruptcy will be two years for an FHA loan and four years for a conventional loan.

Those who experienced foreclosures in the beginning years of the mortgage meltdown (2007 and 2008) may be eligible now to borrow money and buy a home again. FHA requires a three year wait from the date foreclosure was completed and the title transferred back to the bank. This is a detail that can cause major frustration because even though the homeowners may have been evicted, the bank may not get around to transferring the title for months or even years later. Conventional loans require that up to seven years must pass before the borrower can borrow again.


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Those who have made the effort to go through a short sale and help with the sale of the home are rewarded with much shorter timeframes until they can borrow again. FHA requires a maximum of three years to pass before a borrower can qualify for an FHA loan. However, there may be no waiting period if the borrower had no late payments in the 12 month period prior to the short sale. Conventional financing allows a borrower to borrow again within two years if they are buying with at least 20 percent down.

The alternative to an FHA loan or a conventional loan would be a private money loan, sometimes referred to as hard money. These lenders may not care so much about your credit history but probably will require 30 percent or more down and will charge interest rates of 8 percent or higher.

It often comes as a surprise to refinancing homeowners to find out that even one late payment within the past 12 months on a mortgage can cause severe damage to a borrower's credit score. In fact, a 30 day late payment on a credit card payment can lower a credit score to the point that could affect the borrower's closing costs by thousands of dollars. Take good care of your credit and your credit will take good care of you.

Local mortgage consultant Peter Boutell has been writing a weekly column for the Sentinel since 1995. Send questions to 'Lending a Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062, fax them to 425-1044 or email them to peter@santacruzhomefinance.com. Archived columns are available at www.peterboutell.com.