Obtaining an FHA-Insured Mortgage After Bankruptcy

One major worry for those who file bankruptcy is that it will cause damage to their credit and prevent them from obtaining loans such as a mortgage in the future. Although bankruptcy will likely have an impact on the filer’s credit, it can still be possible to qualify for a mortgage as soon as one year after filing for bankruptcy.

A recent bulletin by the Federal Housing Administration (FHA) announced a change in policy that will have a beneficial effect for those who have filed for bankruptcy and are looking to purchase a new home. For those unfamiliar with FHA-insured loans, these loans typically have smaller down payments and competitive interest rates. Although traditionally these loans have been for those with lower income, there is no income minimum or maximum to qualify for an FHA-insured loan. To determine qualification, the FHA will look at a borrower’s debt to income ratio. A complete copy of bulletin 13-26 is available from the U.S. Department of Housing website.

Typically, the FHA will not offer to insure a loan until more than two years after a bankruptcy or three years after a debtor has foreclosed on a mortgage. Due to recent improvements in the economy and the large number of persons who suffered from bankruptcy and foreclosure while the economy was in recession, the FHA has decided to relax this requirement. Now, borrowers may qualify for an FHA mortgage loan only 1 year after bankruptcy if their bankruptcy was the result of an extenuating “economic event.” Extenuating Economic Event

If you filed bankruptcy because you lost your job or your source of income was significantly decreased, you may have suffered from an extenuating economic event. The FHA defines an extenuating economic event as an occurrence beyond the borrower’s control that results in loss of employment, loss of income, or a combination of both. The event must have reduced the borrower’s income over a 6-month period by 20 percent or more. In order to qualify for an FHA-insured loan using the extenuating economic event exception, a borrower must re-establish satisfactory credit for one year in the eyes of the FHA. In determining whether a borrower has satisfactory credit, the FHA will look at a number of factors:

• Is the borrower’s credit history free from late payments on housing debt, installment debt, or major credit accounts during the previous year?
• If the borrower has an open mortgage, have the payments been current for one year?
• If the borrower has a rental payment, have they been current with their rental payments for one year?
• Has the borrower been more than 30 days delinquent on any other credit payment in the previous year?
• Have any other collection accounts or court records been reported in the previous year?

If the borrower satisfies the above criteria, the FHA may find that they have satisfactory credit and that they qualify for an FHA-insured loan. For those who have filed from bankruptcy and are starting to get back on their feet, this policy may help them purchase a home sooner than they would have otherwise been able to.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code