How bankruptcy affects the ability to borrow under a FHA a loan
Most reputable lenders, including Quicken Loans, will not consider you for financing until at least one year after the Chapter 13 bankruptcy have been discharged. Some exceptions are made for US veterans. If you find a lender who will consider you prior to one year, make sure you are fully aware of all the terms and conditions included in your mortgage. Filing for bankruptcy is a big decision that has a lot of implications for your current and future financing. Make sure you discuss your options with a lawyer or your financial advisor before you stop making payments or file for bankruptcy. In a tough economy borrower’s worry about bankruptcy, foreclosure, and the effects such issues can have on the ability to borrow. One big topic these days regarding FHA home loans involves the required waiting period for new FHA home loans after filing bankruptcy or foreclosure. A good example of a frequently asked question in this area: “When does the waiting period began per FHA Guidelines? If you included a conventional loan in a Chapter 7 bankruptcy, does the waiting period began at the discharge date? Or does the waiting period begin at the trustee sale?” After Chapter 7 bankruptcy, (not to be confused with Chapter 13 bankruptcy rules) the borrower must wait out the FHA’s minimum “seasoning” period. At the time of this writing, that period is two years plus any additional amount required by the lender. Some banks will require that a borrower wait a total of three years before applying for a new home loan. Other lenders may be willing to work with qualified borrowers after the FHA two-year minimum for Chapter 7, but it is important to note that the required waiting period begins from the time the bankruptcy is discharged–NOT the time the bankruptcy is filed. FHA rules allow a lender to consider approving an FHA loan application from a borrower who is still paying on a Chapter 13 Bankruptcy-but only if those payments have been made and verified for a period of at least one year. The borrower isn’t automatically able to apply for a new FHA loan if they meet this requirement–the court trustee’s written approval is a condition of the policy. Additionally, the borrower must write a detailed explanation of the bankruptcy and submit it with the loan application. The borrower must have good credit, a satisfactory employment history and other financial qualifications. As mentioned above, all borrowers must wait least two years after the discharge date of a Chapter 7 Bankruptcy. The discharge date should not be confused with the date bankruptcy was filed. As with Chapter 13 bankruptcy, FHA regulations demand a full explanation to be submitted with the FHA home loan application. To get a new FHA insured mortgage loan after Chapter 7, the borrower must qualify financially, establish a history of good credit in the wake of the filing of the Chapter 7, and meet other FHA requirements. Chapter 13 bankruptcies are more like a repayment plan and less like a total wipeout. With Chapter 13, you file a plan with the bankruptcy court detailing how you will repay your creditors. Some debts will be paid in full; some will be paid partially or not at all, depending on what you can afford. Chapter 7 = wipeout. Chapter 13 = plan. Chapter 7 bankruptcies (liquidation) does not disqualify a borrower from obtaining an FHA mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations. The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner. Additionally, the lender must document that the borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur. A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction. 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