Many people believe that once they file bankruptcy it can be years before they can obtain the credit necessary to live in a home again. Fortunately, that’s not true. For many petitioners, the amount of time between bankruptcy and homeownership can be a matter of mere months. The U.S. Department of Housing and Urban Development (HUD) runs a program through the Federal Housing Authority (FHA) that guarantees mortgage loans for those who have filed bankruptcy, provided they have met certain requirements.
For those who have filed a chapter 7 bankruptcy due to “extenuating circumstances” (i.e. not because they didn’t want to pay their debts), the FHA places a two-year limit between the date that they received their discharge and their application for an FHA loan. For bankruptcies without extenuating circumstances, the limit is seven years. And yes, that’s the discharge date and not the filing date. The FHA requires buyers to demonstrate an ability to manage their financial affairs, with documentation.
In a recent change to the FHA rules (Mortgagee Letter 2013-26), buyers need only wait one year after they go into foreclosure, complete a short-sale, offer their deed in lieu of foreclosure, or receive a discharge before qualifying for a guaranteed loan. However, they must show with documentation that their bankruptcies were caused by an “economic event” that has three characteristics:
- Certain credit impairments were the result of a loss of employment or a significant loss of household income beyond the borrower’s control;
- The borrower has demonstrated full recovery from the event; and,
- The borrower has completed housing counseling.
The “certain credit impairments” point means the event caused the debtor to lose 20 percent of his or her income over a six-month period. Typical examples include job losses, pay cuts, hour cuts, furloughs, and losses due to medical problems. Debtors must also have had a history of good credit before the economic event and after.
Debtors who filed in chapter 13 rather than chapter 7 are subject to slightly different rules. They can apply for a FHA-guaranteed loan after they have completed only one year of their repayment plans, but they must obtain a letter from the bankruptcy trustee that lists the dollar amount the plan allows them to borrow for a home. Buyers must also submit an explanation of their bankruptcies and be gainfully employed.
The rules governing a post-bankruptcy FHA-guaranteed loan application are complex, but they are workable, so don’t let the prospect of not being able to live in a home discourage you from bankruptcy.
For answers to more questions about owning a home after bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
