With the rise of Bankruptcies in our nation as a result of the recent financial upheaval many are wondering if they will qualify for an FHA Home loan with a recent bankruptcy on their credit report and in county records. Others may be seeking other types of conventional financing. In either case they would like to know how a past bankruptcy will affect their ability to obtain a mortgage. The matter gets a little more complicated since a Chapter 7 and a Chapter 13 will bring to bear different qualifying guidelines depending on which loan program the borrower is seeking.
Chapter 7 bankruptcy
Must be discharged for at least 2 years. If the discharge date was more than 12 months but less than 24 months than extenuating circumstances must be documented. Not being able to sell a home due to a job loss or transfer would not qualify as an extenuating circumstance. The borrower must have re-established credit and can show a payment history to the new creditors. Or, they may choose to not re-establish credit because they do not want to incur anymore debt. It will also require the lender to document that the situation that led to the bankruptcy no longer exists. The reason for this is simply that the lender does not want to see the borrower get into financial trouble again. So, if they can document what led to the bankruptcy and how they have corrected the habits or situation that led them to file that would show the borrower has become financially responsible and the probably of filing again sometime in the future diminishes greatly. But, mainly it demonstrates the ability to handle the overall household finances especially in regards to being able to make a mortgage payment on a timely basis each month.
Chapter 13 bankruptcy
Requires that 12 months of payout has occurred and that the payments have been made on time and also the court would have to give permission to enter into a mortgage transaction. What this means is that a person could be in a Chapter 13 currently and be able to obtain financing if all other underwriting guidelines are met. How about that? Would any sub prime lenders allow a current 13 to be underwritten? I don’t think so. That’s why this type of mortgage is so helpful to many people and you get market interest rates rather than sub prime rates with pre-payment penalties.
There are no prepay penalties on an FHA loan. So, in essence a Chapter 13 is treated kind of like a consumer debt. Must show 12 months of payments made on time. How many home buyers are there that need this information? They’ve been told by their local bank or by conforming lender that they don’ t qualify and so their hopes and dreams are dashed thinking they can’t purchase a home for several more years. This information should cause them to contact a lender who specializes in FHA home loans and see about getting approved.
Similarly to a Chapter 13 Bankruptcy would be a Consumer Credit Counseling scenario. Folks who have elected this route to pay down their debts should be relieved to know that they also can apply for a mortgage as long as they meet similar guidelines. Show that they have made payments for 12 months in a timely fashion and get permission from the counseling agency to purchase a home and incur new debt.
In all 3 scenarios listed above it is important to not incur any derogatory credit. None whatsoever. Just put yourself in the underwriters shoes. There is a BK7 or BK13 or CCC and derogatory credit after the discharge or during the repayment period – how do you think that will look? It will look like the person has complete disregard for paying their bills on time. We all know that situations arise that prevent bills to be paid on time, however, most of these are not extenuating circumstances from a lender’s perspective. So, keep your nose clean.