Mortgage Bankruptcy Rules

Question about Mortgage Bankruptcy Rules-starts here…

It is never fun to write about adversity, however, it can happen to anyone. Negative life things occur to everyone at some point in life. Today, our post will tell you the guidelines for Bankruptcy – mortgage rules and regulations.

The Federal Law Allows Bankruptcy

Federal law allows a person to deem themselves bankrupt when they experience an impossible ability to repay their debt. The law is much stricter than it has ever been, however, it is still within a person’s lawful right to declare bankruptcy.

This can occur from the loss of a job, an illness, even debt overload. Bankruptcy law provides for a plan to allow a debtor to resolve debt overload by dividing his assets (if any), to the creditors.

Most individuals will hire an attorney who specializes in Bankruptcy.

There Are Different Bankruptcy Titles

Chapter 7 – Individual,

There is a Chapter 13, for Individual, and

The law allows a Chapter 11 for businesses

We will speak here about the first two bankruptcies listed in more detail.

Mortgage Investor Guidelines – Specific Guidelines Chapter 7 & 11: Fannie Mae Guidelines

Applying for a new mortgage loan after a Chapter 7 bankruptcy has a standard guideline of 4 years from the discharge or dismissal. *The only deviation that will allow 2 years is under extenuating circumstances.

Under certain extenuating circumstances – there may be an exception given depending upon the examination of the entire credit history. That exception is after 2 years from discharge or dismissal.

FHA – requires only 2 years after discharge or dismissal.

The question is what are extenuating circumstances?

Extenuating circumstances are:

• Beyond the borrower’s control
• One time bankruptcy only
• A significant reduction in income
• Divorce
• Illness
• Loss of job

As an underwriter, I would also review the borrower’s credit practices prior to the bankruptcy and the derogatory credit. I would look at their income at the time of the bankruptcy.

With extenuation circumstances the question is does the applicant have sufficient credit lines? Can they be verified and been paid in a timely manner and have they recovered from their financial crisis? There should be no 30-day late payments.

Specific Guidelines Chapter 7 Re-established Credit

Most lenders will require at least 12 to 24 months of re-established credit for a Chapter 7 Bankruptcy.

Preferably, this would be an installment loan with no delinquency since inception. However, revolving accounts are acceptable with a history of no delinquency.

Non-Traditional Credit

Non-traditional credit is the documentation used in certain circumstances when credit is lacking  sufficient lines of credit on the credit report:

• Rent with at least 12 months of no delinquency
• Hazard insurance coverage (Rental Insurance)
• Phone
• Car Insurance

*In most instances, these non-traditional sources of credit are verified through the credit bureau.

The mortgage file will need a letter of explanation that details the circumstances of the filing and explaining how they have returned to being in a favorable credit standing.

Chapter 13 Bankruptcy Guidelines

As you know, Chapter 13 is where you have entered into an agreement with your creditors to pay the outstanding balances over a period. It is often 24-36 months or less, depending on the amount of debt.

Waiting Period To Obtain a Mortgage -Chapter 13

The normal waiting period without extenuating circumstances is 2 years from the discharge date and 4 years from the dismissal date.

With extenuating circumstances, it is normal to verify and document the issues and the time frame is now 2 years from the discharge date or 2 years from the dismissal date.

Chapter 13 allows the applicant to repay debts they cannot pay off in Chapter 7. They include taxes, child support, or tax penalties.

Multiple Bankruptcy Filings

The normal waiting period for more than one bankruptcy is 5 years within the past 7 years

With Extenuating Circumstance:

3 years from the most recent bankruptcy discharge date or dismissal date

The Applicant With a Foreclosure:

The normal elapsed time is 7 years. When there are extenuating circumstances such as loss of a job- the waiting period is 3 years.

There are additional requirements that are needed for foreclosure after the 3-year period up to the 7-year period, and they are:

• Primary Residence
• Purchase or Limited Cash-out Refinance (the latter includes any property type)
• Loan To Value Limited is 90%

Check these mortgage underwriting process

Summary

I have endeavored to publish the latest documented information relating to investor guidelines for getting a new mortgage applicant with bankruptcy. Lenders often use their own guidelines in decision-making that entails credit issues. That includes credit score minimums, extenuating circumstances, etc.

All changes posted here are as accurate as possible, however, there could be certain additional guidelines not mentioned here when you visit the lender. Rules and regulations change frequently.