June 3, 2013
A reader asks, “I recently completed a debt reorganization on ch 11 bankruptcy. My plan is 5 years. I will not be discharged until then (5 years).”
“However, I would like to refinance my mortgage loan. my credit score is bad because I am in bankruptcy for the next 5 years. Can I refinance ? Can a FHA loan help me and would they refinance my existing loan?”
FHA loan rules have plenty to say about bankruptcy issues. For example, in HUD 4155.1 Chapter Four, we find the following:
“A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have
• re-established good credit, or
• chosen not to incur new credit obligations.
An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower
- can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
- has since exhibited a documented ability to manage his/her financial affairs in a responsible manner. “
Elsewhere in Chapter Four, we find information about Chapter 13 bankruptcy:
“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.”
Chapter Four also adds, “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.”
Unfortunately, HUD 4155.1 doesn’t address Chapter 11 Bankruptcy in this section–only Chapter 7 and Chapter 13 bankruptcies. The reader may need to assistance of an FHA rep to learn what is required in such cases. CAll them directly at 1-800 CALL FHA.
Do you have questions about FHA home loans? Ask us in the comments section.
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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