In today's market, I receive many phone calls from people who have either had to file bankruptcy or had a foreclosure. These come from all walks of life...those who made unwise financial decisions to those who are in this position through no fault of their own. Either way, folks are hungry for guidance and information.
In this post I am going to talk about FHA guidelines and what they have to say about the two big NO-NO's.
As far as Foreclosure, a borrower in most circumstances is not eligible for three years after principal residence or other real property was foreclosed or deed-in-lieu was given. However, the lender may grant an exception to the 3 year period if the foreclosure was the result of documented extenuating circumstance beyond the control of the borrower. This could include a serious illness or death of a wage earner, and the borrower has established good credit since the foreclosure. Divorce is not considered an extenuating circumstance BUT if a borrower whose loan was current at the time of a divorce in which the ex-spouse received the property and the loan was later foreclosed does qualify as an exception. The inability to sell a property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.
Now to address bankruptcy, if at least two years have passed since the date of discharge (Chapter 7) and the borrower has reestablished good credit or chosen not to incur new debt, in most situations would qualify for FHA insured mortgage. Possibly less than two years but not less than 12 months may be approved if the borrower can show the BK was caused by extenuating circumstances beyond his/her control and has since shown a documented ability to manage their financial affairs in a responsible manner. The lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to recur.
(Chapter 13) is a little different since this is a BK overtime. If the lender can document that one year of payout under the bk has elapsed and payment performance has been satisfactory and all payments have been made on time, then the borrower may be eligible. The borrower MUST have written permission from the courts to enter into this transaction. We must be able to show two years from the discharge date of Chapter 13 BK. If the Chapter 13 BK has not been discharged for a minimum of 2 years, the loan must be downgraded to a manual underwrite.
If you need a home mortgage financing, Valerie Springer is your expert loan officer.
Yours to Count On,