What Is the Time Frame for Applying for an FHA Mortgage After Bankruptcy?
- After a Chapter 7 bankruptcy, where all debts have been dissolved, FHA requires a two-year waiting time after your date of discharge. This time needs to be used to rebuild credit. For twelve months prior to the date of application for an FHA loan, payment history on all new accounts as well as cell phone bills, utilities, and rent should be on time or early. After a bankruptcy, a lender takes the reasons for the financial devastation into consideration, but proof must be shown that the borrower can now handle his finances.
- A Chapter 13 bankruptcy is a repayment structure of debts which is handled by a court-appointed trustee. If you are a homeowner, and want to refinance your home, it is possible to refinance your home and buy yourself out of the Chapter 13. You must have at least 12 months of perfect payment history on the Chapter 13, as well as other payments you are making, and you must have permission from your trustee. If you are in a Chapter 13 and want to buy a home, the same rules apply. If you are discharged from your Chapter 13, there is a 12-month waiting period, during which time you should continue paying bill on time or early. Establish new accounts to rebuild credit and be sure to pay them on time.
- The leniency of FHA with past bankrupted home-buyers are a part of the conditions from which FHA was born. After the Great Depression, millions of people were out of work, new construction had all but halted, and the United States had seen only about 40 percent of its citizens become homeowners. Many of those lost their homes to the banks, and the economy was flattened. New home purchases were very hard to get since the banks required a 50 percent down payment. The loans then were mostly three- and five-year balloon notes where a refinance of the note was required.
In 1934, President Franklin D. Roosevelt created FHA (Federal Housing Authority) which included MIP (mortgage insurance premium). This insurance could be financed into the loan. If the borrower defaulted, the lender had funds to repay his losses by filing an insurance claim. This security was offered in exchange for making a 30-year fixed rate loan to a borrower with very little down payment. The theory of FHA was to get people in a home, which would help rebuild the economy. This was a challenge due to so many foreclosures, but is still a part of FHA today. - The benefits of FHA lending are many. Conventional lending now requires a four-year waiting period after a bankruptcy discharge, so FHA clearly has the shortest waiting period. The lender that funds the loan has a pool of insurance funds to recuperate its losses if a borrower defaults. The lender does not operate in fear of losses on this type of loan, and can benefit from writing this business. The borrower can still buy a home with a low (3.5 percent) down payment, and get a good interest rate making his payment affordable. He gains all the tax advantages of home-ownership, and can build equity in his home.
- As the mortgage meltdown has continued to cause financial losses for homeowners and banks, many changes have been made with all residential -type lending practices. FHA has increased the amount of down payment to 3.5 percent of the purchase price of a home. The upfront mortgage insurance premium (ufmip) amount has increased to 2.25 percent of the loan amount for all loans (there is no longer a sliding scale based on credit score). In the past the seller could contribute up to 6 percent of the loan amount for a borrowers closing and other costs. This has now been reduced to 3 percent. FHA is making these changes in an effort to attract higher quality loans, where borrowers can show ability to save money.
