February 15, 2012
A reader asks, “Bankruptcy filed just 2 years ago, is there a way around that? Have a descent (sic) income, employment and debt to income ratio.”
There are two types of bankruptcy borrowers sometimes ask about in these cases. One is Chapter 7, where the borrower has debts discharged. The other is Chapter 13, where borrowers have a restructured payment plan enforced by court order.
For Chapter 7, FHA loan rules require a minimum two year waiting period from the discharge of the bankruptcy before a borrower may apply for a new FHA mortgage. There is no workaround for this two-year minimum, even when the borrower has tried to reestablish good credit and employment in the wake of the bankruptcy.
However, for those who have filed Chapter 13 bankruptcy, FHA rules state, “…a person in Chapter 13 bankruptcy can purchase a home subject to a FHA-insured mortgage. Requirements are the applicant (1) must have completed one year of payments as required while under Chapter 13 and (2) must obtain a letter from the Trustee of the court, stating the dollar amount the applicant can borrow…”
There are no workarounds for these rule. The borrower must comply with either the two-year waiting period for Chapter 7 or abide by the Chapter 13 rules as stated above. The court trustee must issue the letter approving the new loan and the borrower must find a lender willing to work with the current situation.
That can be a challenge in some cases–lenders generally require proof that the borrower has sufficient credit and ability to repay even in the best of times, but a borrower with bankruptcy issues would need careful planning and a good track record (post-bankruptcy) in order to convince the lender the loan is a good risk.
People can and do apply for FHA insured home loans in the wake of their bankruptcies. But the key is planning and taking the right steps. One of the most important things a borrower can do is get a referral to an FHA approved credit counselor for some advice on how to proceed after bankruptcy to insure the best possible chances for loan approval.
See the FHA Resource Center for more information and contact numbers.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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