March 15, 2017
A reader got in touch recently about issues related to Chapter 13 bankruptcy and FHA mortgage loans. “I made all payments for 6 years on my chapter 13 and they said I have to wait 2 more years to be approved when my credit score is over 730. I dont get it I paid my dues and still have to wait.”
The primary confusion here is associated with the FHA loan rules in HUD 4000.1 regarding “seasoning” periods that are required in the wake of certain types of negative credit events such as a bankruptcy. The rules vary depending on the type of bankruptcy you have filed, but in the case of this reader question, let’s examine what FHA loan rules have to 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.”
That sounds like the borrower has a good chance at getting a new FHA mortgage provided the following applies:
“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.”
Based strictly on the rules mentioned here and the description in the reader’s question, there should be no trouble at all for the reader to get qualified for a new loan-but unfortunately FHA loan rules are not the only requirements in play for such circumstances.
Borrowers must remember that the qualifying standards of the financial institution they are applying with would also have a say above and beyond FHA minimum requirements. So in the case of this reader question, it is entirely possible that the lender’s standards require more than simply meeting the FHA minimums. This is permitted as long as the lender’s standards are applied in accordance with the law including Fair Housing Act rules.
Lender standards for FICO scores and other financial qualifications are often higher than the FHA minimums. The borrower’s option in this case would be to shop around for a lender who might be willing to work with the applicant under the circumstances mentioned in the reader question.
A lender who does work with these circumstances is required by the FHA loan program to verify that the causes of the Chapter 13 bankruptcy won’t be an ongoing problem, as discussed in HUD 4000.1, page 247. “The Mortgagee must also document that the Borrowers current situation indicates that the events which led to the bankruptcy are not likely to recur.”
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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