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Back to Work: How the new FHA Loan Guidelines Apply to Bankruptcy

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In our last several blog posts we’ve been examining an important new development from the FHA, a program known as Back To Work that allows lenders to work with borrowers who may have negative credit information due to the recession that doesn’t necessarily reflect the ability to pay for an FHA mortgage.

The FHA describes an applicable financial setback as an “economic event” and allows borrowers to be more lenient with credit requirements for qualified borrowers. Back To Work rules were issued in FHA Mortgagee Letter 2013-26, which says “FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.”

Many potential FHA borrowers want to know how the Back To Work rules might affect those with Chapter 7 or Chapter 13 bankruptcies. The FHA has made specific mention of such circumstances and has this to say on the subject:

“The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.”

Additionally, “To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:

  • the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
  • the borrower’s derogatory credit occurred after the Economic Event Onset, and
  • the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months.”

What other rules apply for those who have filed bankruptcy? According to FHA Mortgagee Letter 2013-26:

D. Economic Event-Related Chapter 7 Bankruptcy

The lender must verify and document that:

  • a minimum of twelve (12) months have elapsed since the date of discharge of the bankruptcy; and
  • the bankruptcy was the result of the Economic Event.

E. Economic Event-Related Chapter 13 Bankruptcy

The lender must verify and document that:

  • the Chapter 13 Bankruptcy was discharged prior to loan application and all required bankruptcy payments were made on-time, or a minimum of twelve (12) months of the pay-out period under the bankruptcy has elapsed and all required bankruptcy payments were made on time; and
  • the bankruptcy was the result of the Economic Event. If the Chapter 13 Bankruptcy was not discharged prior to loan application, the lender must also verify and document that the borrower has received written permission from the Bankruptcy Court to enter into the subject mortgage transaction.”

Do you have questions about FHA loans? Ask us in the comments section.

4 Responses to Back to Work: How the new FHA Loan Guidelines Apply to Bankruptcy

  1. I have filed for Chapter 7 Bankruptcy and was discharged in May of ’12. I had a credit score in the high seven hundreds, to the low eight hundreds, prior to my Bankruptcy. Because of the real estate crash, I lost my home and business. Can I still qualify for an FHA loan at some point, and if so, what are the criteria and which lenders do I aply with?

    • Joe Wallace says:

      The new Back To Work guidelines may be of help to you depending on the circumstances of your financial difficulty. Contact the FHA directly by calling 1-800 CALL FHA to learn more about how Back To Work may affect you.

  2. Al Bodie says:

    My bankruptcy was discharged December 7 2011. Prior to filing I had very good credit, but was forced to retire because of cutbacks. I currently have a Fannie Mae insured mortgage through a local bank and want to go to a small house and sell my current one. Since filing discharge my wife and I have a good credit record. When I called the bank they now tell me FHA requirement is 3 years. Previously I was told 2 years. Who is right and what can I send the bank to show them the answer.

    • Joe Wallace says:

      The answer may depend on the type of bankruptcy, lender standards, and the circumstances of the bankruptcy. Best advice–contact the FHA directly at 1-800 CALL FHA for additional information. HUD 4155.1 Chapter 4 Section C addresses FHA minimum standards, which may be as short as two years depending on circumstances.

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