A reader asks, “I was just released from Chapter 13 Bankruptcy and I would like to buy a house. What do I have to do to achieve this? My credit score is 635, 635 and 643.”
FHA loan rules printed in HUD 4155.1 state that simply having a Chapter 13 bankruptcy does not disqualify you from getting an FHA loan, but there are certain standards a borrower needs to meet which must also be documented by the lender. Specifically, HUD 4155.1 Chapter Four Section C states, 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.”
FHA loan rules add a caveat that is quite important to note:
“Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.”
Is this the FHA’s final word on the subject? Are there ever exceptions to the two-year rule? Yes, according to Chapter Four Section C–you may not be automatically turned down if less than two years have elapsed since your bankruptcy was discharged:
“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.” That means you may still have a chance for loan approval depending on circumstances.
However, these rules are not the only ones that affect your application–the rules of your financial institution or even state law may also dictate what’s to happen in these cases. You may need to discuss your situation with a loan officer to learn what applies in your circumstances.
Do you have questions about FHA loans? Ask us in the comments section.