FHA Loans and Bankruptcy
“Can I get FHA financing after a bankruptcy?” This is one of the most commonly asked question by a borrower. Contrary to common belief, a borrower can qualify for an FHA loan even if they filed for bankruptcy in the past. There are statutes of limitation that applies to every type of bankruptcy filing.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a debt re-structure program. Under the Chapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, it allows individuals to forego a financial reorganization supervised by a federal bankruptcy court.
Typical terms of Chapter 13 bankruptcy is between 3 – 5 years in repayment. Creditors are offered payment of the debts in part or in full and release the debtor from future obligations. Upon completion of the term of repayment, the Chapter 13 bankruptcy is Discharge by the court.
If the debtor does not pay or comply with the terms of the Chapter 13 bankruptcy, the court can “Dismiss” the bankruptcy filing. This means the debts are not discharged and the automatic stay that protects the debts is automatically lifted. The creditors can have the right to collect past debts again.
FHA will allow a borrower who has an open Chapter 13 bankruptcy get an FHA insured loan if the terms of repayment are being made satisfactorily for last 12 months. The bankruptcy court has to allow and give permission to obtain a new loan. The borrower must provide a Letter of Explanation regarding said bankruptcy filing, demonstrate financial stability and good job history over and above the re-establishment of good credit standing.
Chapter 7 Bankruptcy
Under the Chapter 7 of the Title 11 of the United States Bankruptcy Code, it is the process of liquidation with regards to certain exempt property. This is the type of bankruptcy that wipes out all the debts, the court’s assigned trustee collects all the debtor’s assets and sell them (non-exempt assets) accordingly. The proceeds from the sale of assets are then paid or distributed to creditors. After all creditors are satisfied, they court will Discharge the bankruptcy.
FHA will allow a borrower to get an FHA insured loan two (2) years after discharge of a Chapter 7 with no extenuating circumstances. However, a borrower can qualify for an FHA insured loan sooner, at the Underwriter’s discretion, if they can provide and document extenuating circumstances behind the Chapter 7 bankruptcy filing.
FHA’s guide to a securing a mortgage states that at least 2 years must elapse since the date of discharge. However, it is common practice by lenders to use 3 years as the Statute.
What is an Acceptable Extenuating Circumstances?
They are non-recurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or extreme increase in financial obligations. Events that are unpredictable, temporary in nature, out of the borrower’s control, and unlikely to happen again.
Examples of an Acceptable Extenuating Circumstance:
•FHA considers a serious illness or death of a wage earner to be an extenuating circumstance. FHA does not consider divorce, job transfer and inability to sell a home, or job loss as an extenuating circumstance.
•VA may consider unemployment, prolonged strikes, or medical bills not covered by insurance. VA considers divorce with-in your control and not an extenuating circumstance.
•USDA may consider the loss of a job, delay or reduction in government benefits or other loss of documented income; increased expense due to illness or death.
FHA loan after a short sale
• No waiting period if homeowner was current on mortgage when short sale closed;
• Three (3) year wait if homeowner was in default at closing;
• Less than three (3) year wait if the homeowner has re-established good credit and can show extenuating circumstances;
• A borrower is considered eligible for a new FHA insured mortgage if, from the date of loan application for the new mortgage, all:
a. Mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and
b. Installment debt payments for the same period were also made within the month due.
A borrower in default on their mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA insured mortgage for three (3) years from the date of the pre-foreclosure date. Note: A borrower who sold their property under FHA’s pre-foreclosure sale program is not eligible for a new FHA insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.
For more information about FHA loans and bankruptcy, Short Sale, or Extenuating Circumstances, call us at 281-860-2533.