By Columbia – Lexington Bankruptcy Attorney Lex Rogerson
Our bankruptcy clients in the Columbia area are understandably concerned about the impact of their filings on their future financial lives. The Federal Housing Administration has now improved that picture by reducing the period chapter 7 bankruptcy debtors must wait after discharge to apply for new mortgages.
In a mortgagee letter directed to lenders approved to make FHA-insured loans, the government now says debtors, who previously had to wait two years after their bankruptcy cases were complete, may apply as soon as a year after discharge. And chapter 13 debtors who have made their trustee payments on time can qualify, as they previously could, even while they are still paying on their plans.
The role of FHA
FHA does not lend money for mortgages. Instead, it insures mortgage loans that private financial institutions and state housing finance authorities extend and thereby encourages mortgage lending. Since the beginning of the mortgage crisis, FHA has played an increasing role in promoting mortgage lending as the private mortgage funding market dried up.
FHA insured about a quarter of the new single-family home mortgages originated in 2011. But its importance for those with troubled financial history is greater than that number suggests, because it emphasizes lending to low- and moderate-income borrowers. FHA currently insures about half the home loans being made to African-American and Hispanic borrowers. And FHA loans frequently require a lower down payment than the 20% that is currently the minimum with most conventional home loans.
Under the new mortgagee letter, the shortened waiting periods are not limited to those who have filed bankruptcy. They also apply to those who were party to a foreclosure, short sale, or deed in lieu of foreclosure or had other negative credit history such as judgments. Applicants must show the bankruptcy, foreclosure, or the like resulted from a loss of employment or other economic event that caused a 20% or greater loss of income for at least 6 months. They must prove they have now re-established satisfactory credit by paying their debts timely for at least a year. They are also required to complete housing counseling as a prerequisite.
As a result of these rules chapter 7 debtors may now apply for FHA-backed mortgages as soon as a year after receiving their discharges. But the timing is even looser for those who have filed chapter 13. They may apply immediately after discharge — or even before, if they can show at least 12 months of timely plan payments. If they apply while the bankruptcy is in progress, the bankruptcy court must approve the loan. Most bankruptcy courts independently require such approval whenever the debtor proposes to incur debt.
The new rules took effect August 15, 2013, and remain effective until September 2016.