April 9, 2013
A reader asks, “I’m in the process of obtaining a FHA Loan. I completed my Chapter 13 bankruptcy a year ago after completing five years of payments on time. My credit score is not an issue right now. All of my paperwork is in, or so I thought. My mortgage lender now tells me that I need a letter from the bankruptcy court saying that I’m allowed to get a loan.”
“She says that this is a requirement of the underwriters. I think that the underwriter should only be asking for this if I was still in the bankruptcy, not now, when I’ve been cleared by the courts. What can I do?”
The answers are not simple in a situation like this, and there are many details we aren’t privy to based on the reader question that could factor in. For example, did the bankruptcy involve delinquency or default on an FHA mortgage? If so, HUD 4155.1 has some relevant information:
“If the borrower has had past delinquencies or has defaulted on an FHA- insured loan, there is a three-year waiting period before he/she can regain eligibility for another FHA-insured mortgage.
The three-year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure, as well as judicial and other forms of foreclosures. Lenders should contact the Homeownership Center (HOC) having jurisdiction over the area where the property subject to default is located for information such as the date the claim was paid, and date of the initial default.”
But since the reader question did not specifically reference such a situation, we’ll turn our attention to the general question–can a borrower with a Chapter 13 bankruptcy apply for an FHA home loan? According to HUD 4155.1:
“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.”
Additionally:
“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.”
The situation referenced in the reader question would depend on the official date the Chapter 13 bankruptcy was discharged. Without knowing that it’s difficult to say what might happen in this case. But the general information is useful for anyone who finds themselves in a similar situation and wondering whether an FHA loan is possible.
Do you have questions about FHA mortgages? Ask us in the comments section.
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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