November 13, 2013
A reader asks, “My bankruptcy was discharged December 7 2011. Prior to filing I had very good credit, but was forced to retire because of cutbacks. I currently have a Fannie Mae insured mortgage through a local bank and want to go to a small house and sell my current one. Since filing discharge my wife and I have a good credit record. When I called the bank they now tell me FHA requirement is 3 years. Previously I was told 2 years. Who is right and what can I send the bank to show them the answer.”
FHA standards say different things depending on the type of bankruptcy and the circumstances surrounding it, but in any case borrowers should know that lender requirements may exceed the FHA minimums–the bank is free to require a longer wait time, though any lender would be less than honest if more stringent requirements are “blamed” on FHA loan rules rather than the lender’s higher standards.
We are not implying this is what’s happening in the case of our reader question–we have no way of knowing what conversations may or may not have taken place–but it’s worth pointing out for future reference.
Here’s what the FHA loan rulebook, HUD 4155.1 Chapter Four Section C, says about Chapter 7 bankruptcy wait time requirements:
“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.”
And here’s what HUD 4155.1 Chapter Four Section C says 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.”
FHA loan rules in this section add, “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.”
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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