There was a time when those who defaulted on their debt, especially mortgages, had to wait 3-5 years before they became eligible for any form of new credit, let alone a brand new mortgage. That, however, was in the Old Normal. In the New one things are different: so different, that for anyone who filed a bankruptcy on or before July 2012, we have good news for you - the FHA (subject to an explanation and several almost painless conditions) will be happy to provide you with a brand new mortgage.
From the recent FHA Mortgagee Letter 2013-26:
FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.
To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:
- certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
- the borrower has demonstrated full recovery from the event; and,
- the borrower has completed housing counseling.
Housing counseling is an important resource for both first-time home buyers and repeat home owners. Housing counseling enables borrowers to better understand their loan options and obligations, and assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower.
Well, we did say almost painless: it is only logical that after filing bankruptcy one should go to housing counseling. Surely that will 'learn' one to buy that 18 bedroom McMansion that the evil banker, gun against head, forced down one's throat.
Either way, once done with the grueling "counseling" sessions, and providing evidence one didn't blow it all in Vegas, the FHA makes one eligible for a new mortgage even with a prior recent bankruptcy, and not just any but Chapter 7 as well as 13, as follows:
D. Economic Event-Related Chapter 7 Bankruptcy
The lender must verify and document that:
- a minimum of twelve (12) months have elapsed since the date of discharge of the bankruptcy; and
- the bankruptcy was the result of the Economic Event.
E. Economic Event-Related Chapter 13 Bankruptcy
The lender must verify and document that:
- the Chapter 13 Bankruptcy was discharged prior to loan application and all required bankruptcy payments were made on-time, or a minimum of twelve (12) months of the pay-out period under the bankruptcy has elapsed and all required bankruptcy payments were made on time; and
- the bankruptcy was the result of the Economic Event.
But what if, gasp, the existing bankruptcy has not yet been discharged? Don't worry: the FHA's got you covered even then:
If the Chapter 13 Bankruptcy was not discharged prior to loan application, the lender must also verify and document that the borrower has received written permission from the Bankruptcy Court to enter into the subject mortgage transaction.
And so on. There are other conditions (the full FHA Mortgagee Letter can be found here) but if the only gate for a bankruptcy as a restraining factor is for 12 months to have gone by, one can imagine just how "strict" the other conditions have to be.
So…party on!
Thanks for reading…as always.
Steve Jackson
561.602.1258
