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Chapter 7 & 13 | Consumer Bankruptcy

FHA Says You Can Qualify for a Mortgage Two Years After Filing Bankruptcy

It seems everyone knows that you can’t get a mortgage after filing for bankruptcy, or that bankruptcy will forever ruin your credit, or that you will never again be able to finance the purchase of a new car if you file bankruptcy.  On the other hand, everyone seems to know you have to wait ten years after a bankruptcy to be able to buy a house….

Wait a minute.  Instead of trying to decide which cocktail party gossip about getting credit after bankruptcy is the most reliable, or worse yet, which bankruptcy lawyer to believe, how about checking what the law says about getting credit after bankruptcy?  That’s right, HUD and FHA regulations, which must be approved by the executive branch of the federal government and which carry the force of law, address this subject.  These regulations make clear that you can indeed get a mortgage shortly after filing bankruptcy

Once you read these HUD and FHA regulations, you will be the only kid on your block who knows for sure whether you can obtain a mortgage and buy a new home after a bankruptcy filing — and when you can do it.

HUD guideline 4155.1 : 4.C.2.g. reads as follows:

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy.  During this time, the borrower must have re-established good credit, or chosen not to incur new credit obligations.  An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note:  The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.

Regarding chapter 13, HUD guideline 4155.1 : 4.C.2.h. reads as follows:

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that one year of the pay-out period under the bankruptcy has elapsed the borrower’s payment performance has been satisfactory and all required payments have been made on time, and the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

TOTAL Scorecard Accept/Approve Recommendation

Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.  If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter.

Reference:  For more information on the TOTAL Scorecard recommendations, see the TOTAL Mortgage Scorecard User Guide.

Now that you know you can obtain a mortgage after filing bankruptcy, your decision about whether bankruptcy could be right for you can be made without fear of being permanently exiled from home ownership.

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