With the rise of bankruptcies in our nation as a result of the recent financial turmoil, many wonder if they will qualify for an FHA home loan with a recent bankruptcy on their credit report and county records. Others may be looking for other types of conventional financing. In either case, they would like to know how a past bankruptcy will affect your ability to obtain a mortgage. The matter gets a bit more complicated as a Chapter 7 and a Chapter 13 will apply different qualification guidelines depending on the loan program the borrower is seeking.
Chapter 7 bankruptcy
You must be discharged for at least 2 years. If the discharge date was more than 12 months but less than 24 months, extenuating circumstances must be documented. Not being able to sell a home due to job loss or transfer would not qualify as an extenuating circumstance. The borrower must have his credit restored and can show a payment history to new creditors. However, they can choose not to restore credit because they do not want to go into debt again. 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 the borrower to get into financial trouble again. So if they can document what led them to bankruptcy and how they have corrected the habits or situation that led them to apply, that would show that the borrower has become financially responsible and likely to reapply. in the future it decreases considerably. But most of all, it demonstrates the ability to handle general household finances, especially in regards to being able to make a mortgage payment in a timely manner every month.
Chapter 13 bankruptcy
It requires that 12 months of payment have been made and that the payments have been made on time and that also the court would have to give permission to carry out a mortgage transaction. What this means is that a person could be currently in a Chapter 13 and be able to obtain financing if all other underwriting guidelines are met. What about that? Would any subprime lender allow a current 13 to be written? I do not believe it. That is why this type of mortgage is so useful to many people and earns market interest rates rather than subprime rates with prepayment penalties. There are no prepayment penalties on an FHA loan. So, in essence, a Chapter 13 is treated like consumer debt. It must show 12 months of payments made on time. How many home buyers need this information? They have been told by their local bank or lender that they do not qualify, so their hopes and dreams are frustrated by the thought that they cannot buy a home for several more years. This information should lead them to contact a lender who specializes in FHA home loans and verify approval.
Similar to a Chapter 13 bankruptcy, it would be a Consumer Credit Counseling scenario. People who have chosen this route to pay off their debts should be relieved to learn that they can also apply for a mortgage as long as they meet similar guidelines. Show that you have made payments for 12 months in a timely manner and get permission from the counseling agency to buy a home and incur new debt.
In the 3 scenarios listed above, it is important not to incur any derogatory credit. None at all. Just put yourself in the place of the insurers. There is a BK7 or BK13 or CCC and a derogatory credit after download or during the refund period. How do you think it will look? It will appear that the person does not fully consider paying their bills on time. We all know that situations arise that prevent bills from being paid on time, however, most of these are not extenuating circumstances from a lender’s perspective. So, keep your nose clean.
For those of you who meet these basic guidelines set out above, take the time to contact a mortgage professional who is an FHA loan expert and see if you currently qualify to buy a home.
