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Bouncing Back from Bankruptcy

For many borrowers, bankruptcy is not the end of the road like some may think, according to a report from LendingTree [1]. Interest rates may go up, but over half of consumers who file for bankruptcy had credit scores of 640 and higher one year after filing.

After two years, when some borrowers are once more eligible for conventional mortgages, 63% had prime scores of at least 640. About 5% had scores of 700 or higher.

After five years, 71% of borrowers had scores of 640 or higher, 41% had scores of 680 or higher and 17% had scores of at least 700.

However, LendingTree notes, the more recently borrowers went through bankruptcy, the higher their offered mortgage APRs were, even compared with others with similar credit scores. Those with scores of 760+ were an exception; they got better APR offers, on average, than those who had no bankruptcies on their records.

Additionally, over 70% of bankruptcy filers are mortgage-eligible after 5 years. Just two years out of bankruptcy, however, mort mortgage borrowers can expect to pay almost $26,000 more over the life of their mortgage than people without a bankruptcy on their records. Even after five years, they can expect to pay more than $9,600.

During the COVID-19 pandemic, as many borrowers are likely to fall behind on payments, many lenders are saying they will not report late payments to credit reporting agencies or waiving late fees for borrowers in forbearance due to this pandemic. Federal Housing Finance Agency (FHFA) Director Mark Calabria discussed with CNBC how forbearance will impact the credit scores of borrowers.

“If you’re in a forbearance plan and you’re meeting the terms of that plan, it will not be reported to your credit bureau, there will not be a ding on your credit,” Calabria said. “If you don't reach out to your lender and get a plan and don’t pay, you will get hit.”