January 29, 2015
We have gotten a large volume of reader questions about refinancing a home while in Chapter 13 bankruptcy. Here’s the latest:
“We have current mortgage, never behind on payment. We like to refinance our home mortgage, but we are discharge from Chapter 13 before couple months! How long we have to wait and are we are qualified? Thank you in advance!”
Let’s examine what the FHA official site has to say about FHA loans and bankruptcy. It’s important to note that all situations vary including the rules at one financial institution compared to another.
Some lenders may be willing to work with certain borrowers in circumstances that others would not–just because the FHA loan rulebook has provisions for borrowers to apply for loans while the applicant is dealing with a bankruptcy or the discharge of a bankruptcy does not guarantee that a lender is willing to extend credit.
Here is what the FHA official site has to say:
“A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.”
This is information we have shared time and again–borrowers who need further clarification on this issue may wish to contact the FHA directly by calling them on their toll-free hotline: 1-800 CALL FHA.
For those who want specific rules and regulations covering this issue, read what Chapter Four, Section C of HUD 4155.1 states:
“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.
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.”
That is the entire section of the Chapter 13 Bankruptcy rules found in HUD 4155.1 Chapter Four, Guidelines For Credit Report Review.
As always, we encourage borrowers in these situations to discuss their needs directly with a loan officer–these types of loan transactions are handled on a case-by-case basis and what may work for one borrower and lender may not work in another situation depending on circumstances.
Do you have questions about FHA refinance loans? Ask us in the comments section. All questions and comments are held for moderation.
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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