FHA revises rules to make one-year wait after Chapter 7 filing

On behalf of Bankruptcy Law Firm of Clare Casas on Friday, September 27, 2013.

It's a myth that a person or a married couple cannot get credit for many years after a bankruptcy. In some cases, credit is extended simply if a person can show a discharge order. Furthermore, due to the recent recession, some lenders are liberalizing their rules to assist those who could not keep their mortgages up-to-date due to losing jobs and other negative economic events. For persons in Florida or nationwide, HUD recently announced a rule change for borrowers who have been through foreclosure, short sale, deed in lieu of foreclosure, or Chapter 7 or Chapter 13 bankruptcy.

The prior rule contained a three-year waiting period for qualification to apply for a Federal Housing Administration (FHA) insured loan. The new rule provides a one-year waiting period if an applicant meets all the requirements. The requirements and instructions are set forth in HUD Mortgagee Letter 2013-26, dated Aug. 15, 2013, which a borrower must examine to obtain the contours of the full program. It appears that these conditions will apply also if you are now facing a Chapter 7 bankruptcy, a Chapter 13 or foreclosure event.

The Letter allows borrowers to obtain an FHA loan if they have experienced a negative economic event that resulted in income loss beyond their control. If that event results in income loss, job loss or both and reduces household income by at least 20% for at least six months, it's a qualified event. Furthermore, borrowers must have re-established satisfactory credit for at least 12 months prior to applying. Mortgages must be current with at least 12 months of timely payments prior to applying. Temporary and permanent loan modifications are acceptable if documented and timely made.

These rules apply nationwide, including to Florida residents. The time that must elapse is a little different for a personal bankruptcy. For Chapter 7 personal bankruptcies, 12 months must have elapsed since the date of discharge, meaning the date that the case was closed. For Chapter 13, a borrower can apply after 12 months of completion of the case, or after 12 monthly payments on the plan have been made. There's also a counseling requirement where the applicant must complete at least one hour of one-on-one counseling with an approved agency.

Source: Home Buying Institute, New Rules for FHA Loan After Foreclosure, Deed in Lieu, Short Sale, Bankruptcy, Brandon Cornett, Sept. 16, 2013