Bankruptcy and Mortgages

Credit card debts among homeowners are at all time high around the world. In the UK it is becoming increasingly common for homeowners to file for bankruptcy when their credit card debts, loans and mortgage repayments become too much for them to manage. For a homeowner, filing for bankruptcy can be a very bad idea as their home will usually be sold in order to release any equity held. Having a bankruptcy on your credit file can make it very difficult to obtain future finance such as a mortgage or unsecured loan.
 
One possible way of avoiding bankruptcy and keeping your home is the Individual Voluntary Arrangement, or IVA. Provided by an IVA company, an IVA is a legally binding arrangement between you and your creditors under which you repay a percentage of your unsecured debt over a fixed period, usually five years. Any remaining debt is written off after the IVA ends.
Obtaining a mortgage after bankruptcy will be very difficult in the normal mortgage market. You would normally need to approach a sub-prime lender who specialises in arranging mortgages for discharged bankrupts.
 
Sub-prime lenders are one of the main sources of post-bankruptcy mortgages who sell the mortgages to their customers through brokers across the world. Lending to a discharged bankrupt is considered very high risk and as such, mortgages issued to discharged bankrupts invariable carry higher interest rates and lending fees. Additionally, restrictions may be placed on the Loan-To-Value (LTV), or the amount loaned in relation to the value of the property. Typically, sub-prime loans for discharged bankrupts have a maximum LTV of 80-90%. Although these conditions may seem harsh, it may be the only method of obtaining a mortgage while a bankruptcy is still recorded on your credit file.
Even with a higher rate of interest, LTV restrictions and higher fees, bankruptcy mortgages may be an extremely useful tool for getting a person’s credit back to track. In fact, a well-managed mortgage is one of the best ways of improving your credit rating. Maintaining payments for 2-3 years will improve your credit rating and an application to a mainstream lender may be viewed more favourably, resulting in a reduced interest rate and better borrowing conditions.