As I stated yesterday in my first blog Bankruptcy Guidelines ........ Fannie Mae on bankruptcy waiting periods and guidelines, many people in our Industry are familiar with the required waiting periods for a bankruptcies, and are mainly just concerned with Borrower having met the necessary time. However, when it comes to bankruptcies there is more to be concerned about then just the waiting period, and the waiting periods for Fannie Mae and FHA are different, as well as the requirements that have to be met after a bankruptcy.
I covered the Fannie Mae guidelines and requirements is in the first blog Bankruptcy Guidelines ........ Fannie Mae and in this blog I will cover the FHA guidelines and requirement for bankruptcies. Unlike Fannie Mae FHA does not have a chart that I know of, because the FHA waiting period for bankruptcies are more condensed and to the point then Fannie Mae. Where that is an advantage when it comes to the waiting periods, I don't see it as an advantage when it comes to the requirements that the Borrower must meet during the waiting period. That is because it leaves more leeway for the Underwriters discretion, and these days they tend to be very conservative with their discretion.
FHA has the same waiting period for a Chapter 7 Bankruptcy as it does for a Chapter 13 Bankruptcy, which is 2 years. But the requirements that a Borrower must meet during that 2 year waiting period is different.
During the 2 year waiting period for a Chapter 7 Bankruptcy the Borrower must have:
- Re-established good credit, or
- chosen not to incur new credit obligations.
(The re-establishing good credit is VERY vague, and can be interpreted by an Underwriter in many ways)
FHA does make exceptions to the 2 year waiting period for a Chapter 7 Bankruptcy. If the bankruptcy occurred less than 2 years, but more than 12 months, and the Borrower can show that:
- The Bankruptcy was caused by extenuating circumstances beyond their control, and
- has since exhibited a documented ability to manage their financial affairs in a responsible manner.
- The lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to happen again.
(Again very vague with lots of room for interpretation)
FHA Guidelines for what must occur during the 2 year waiting period for a Chapter 13 Bankruptcy are a little better defined with less room for interpretation than Chapter 7. During the 2 year waiting period for a Chapter 13 Bankruptcy the Borrower must have:
- One year of the payout period under the bankruptcy must have elapsed, and
- 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
There you have it, and as you can see that once again there is much more to be concerned about with a bankruptcy in order to qualify for a FHA Mortgage as it was with Fannie Mae. A Borrower not only has to meet the time period, but has to also be squeaky clean in regard to their finances during that period.
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