The recently-published rulebook for FHA single family mortgages, HUD 4000.1, contains new rules and guidelines for participating lenders, plus rules that have been updated, clarified, or restated from the previous editions of the rules.
One important area of the new rule book pertains to potential FHA loan applicants who want to apply for a new loan following a Chapter 13 bankruptcy. We get many comments and questions each month involving scenarios where a borrower wants to apply for a new home loan following a bankruptcy. Since the publication of the new rules, what does the FHA/HUD have to say about filing for a new mortgage following a Chapter 13? From HUD 4000.1:
“A Chapter 13 bankruptcy does not disqualify a Borrower from obtaining an FHA- insured Mortgage, if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed.”
As you can see from the quote above, there is a 12 month seasoning period. But FHA loan rules say just waiting out the 12 months isn’t enough–the lender’s participation is required and the borrower must seek approval from the court:
“The Mortgagee must determine that during this time, the Borrowers 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.”
The lender is also required to do some further checking to verify the facts in the case and to insure the circumstances which caused the bankruptcy aren’t likely to happen again.
“If the credit report does not verify the discharge date or additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy, the Mortgagee must obtain the bankruptcy and discharge documents. The Mortgagee must also document that the Borrowers current situation indicates that the events which led to the bankruptcy are not likely to recur.”
Borrowers who have further questions on this issue should speak to a loan officer as lender standards may vary depending on the financial institution. Borrowers are expected to be developing good repayment patterns on all financial obligations post-bankruptcy, and the lender will be responsible for making the final determination on loan approval. FHA loan rules do permit these transactions, but the lender’s standards are also important to keep in mind as they also apply.
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