September 6, 2016
Here’s a good example of the type of question we are commonly asked about credit history issues and FHA home loans:
“I had my chapter 13 dismissed and continue to pay and rebuild my credit. It has been 6 months and I plan to buy a home within the next 6months. Will qualify to buy a home with an FHA loan?”
FHA loan rules in HUD 4000.1 address bankruptcy issues, and the rules can vary depending on the type of bankruptcy. In general (we’ll look at specific FHA loan rules in a moment) you can expect to wait a minimum of 12 months with any type of bankruptcy under FHA loan minimum standards.
We emphasize “FHA standards” here because additional lender standards can and often do apply. The FHA minimum must be met, but lender standards must also be satisfied, which is why it pays to have a conversation with a loan officer to determine what may be possible at a given financial institution.
What does HUD 4000.1 say about Chapter 13 bankruptcy?
“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. 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.”
Permission from the court may or may not factor into the reader question, depending on the nature of the legally binding agreement the potential borrower entered into with the court. Furthermore, HUD 4000.1 places some requirements on the lender in cases involving Chapter 13 bankruptcy:
“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.”
As you can tell from the above, the lender has due diligence to perform in these cases and a potential borrower should be prepared to show documentation and supporting paperwork to the lender as required.
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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