FHA and Bankruptcy

If you’ve been Bankrupt, and you want to purchase a home – FHA will allow you to do that… but there are some rules about FHA and Bankruptcy that FHA sets on you… and then there are the “Golden Rules.”  What I mean by that is this:

FHA  insures loans, but they don’t APPROVE the loans.  HUD has guidelines about FHA and Bankruptcy for a Bank that says, “We will purchase a loan from you if the loan meets these specific parameters.”  The BANK, who is actually lending the money, and getting FHA to INSURE the loan has its own set of guidelines.

FHA GUIDELINES for Chapter 13

FHA will consider approving a borrower who is still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The court trustee’s written approval will also be needed in order to proceed with the loan. The borrower will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.

That’s the guideline… have we EVER seen a Trustee approve this?  No.
FHA Guidelines for Chapter 7 Bankruptcy

At least two years must have elapsed since the discharge date of the borrower and / or spouse’s Chapter 7 Bankruptcy, according to FHA guidelines. This is not to be confused with the bankruptcy filing date. A full explanation will be required with the loan application. In order to qualify for an FHA loan, the borrower must qualify financially, have re-established good credit, and have a stable job.

If the Chapter 7 Included A Residence

FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. However, if the foreclosure of the borrower’s main residence was the result of extenuating circumstances, an exception may be granted if they have since established good credit…This does not include the inability to sell a home when transferring from one area to another.

Okay – so the Bank can get FHA INSURANCE on the loan if it meets the particulars above, but does that mean you are a good credit risk, and they will actually make you a loan?  Well, that could be something entirely different. 

I’m being realistic when I say that if you don’t have at least a 640 credit score you will probably not be getting a mortgage loan, with a recent Bankruptcy in your background.  Once you’ve been Bankrupt, you will be, understandably, looked at closer.  One of the most important things to do (besides re-establishing Credit) is to keep Collections of all kinds OFF of your credit report!

If you have 24 months of clean credit (on time payments no new judgements or collections), and at least THREE revolving credit card trade lines, you might have a 640 score.  If you only have 2 open lines of credit, you probably do not have a 620 score, no matter who long you have been “makin’ the payments on the truck on time.”  The first thing to do is re-establish credit, and make sure you are including revolving credit in your credit score “re-build” process.

If you are past the “Storm” and you are now ready to purchase a house in Raleigh (or anywhere else in North Carolina) please call Steve Thorne .  We help home buyers every month who had a rough patch, got through it and are now able to buy!  919 649 5058