Subject:                                     Bankruptcies guidelines for FHA, VA and FNMA : Tip of the Day

 

Bankruptcies guidelines for FHA, VA and FNMA -

 

·         FHA –

 

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that

 

·         one year of the pay-out period under the bankruptcy has elapsed

·         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.

 

TOTAL Scorecard Accept/Approve Recommendation

Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy. If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter.

 

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have

 

·         re-established good credit, or

·         chosen not to incur new credit obligations.

 

An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

 

·         can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and

·         has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

 

 

§  VA                                          

e. Bankruptcy

The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.  Develop complete information on the facts and circumstances of the bankruptcy.  Consider the reasons for the bankruptcy and the type of bankruptcy filing.

 

Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law

You may disregard a bankruptcy discharged more than 2 years ago.

 

If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:

 

the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and

the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.  Divorce is not generally viewed as beyond the control of the borrower and/or spouse. 

 

If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if

-    the applicant obtained a permanent position after the business failed,

-    there is no derogatory credit information prior to self-employment,

-    there is no derogatory credit information subsequent to the bankruptcy, and

-    failure of the business was not due to the applicant’s misconduct.

If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.

 

Petition Under Chapter 13 of the Bankruptcy Code

This type of filing indicates an effort to pay creditors.  Regular payments are made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to pay off scaled down or entire debts.

 

If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit.

 

If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration

 

 

 

 

·         FNMA:

The following table outlines Fannie Mae’s current and new policies for manually underwritten loans related to the time period that must elapse before borrowers can demonstrate they have reestablished an acceptable credit history after the occurrence of the bankruptcy or foreclosure. The table also includes new “Additional requirements” that apply to foreclosures.

Action 

Current Requirements 

New Requirements 

 

 

Bankruptcy (All Except Chapter 13)  

4-year time period from discharge date 

The 4-year time period remains the same but will now be applied from either the discharge or dismissal date of the bankruptcy action. 

 

 

 

Chapter 13 Bankruptcy 

2-year time period from discharge date 

The time period for Chapter 13 bankruptcy actions is measured as follows:

•

2 years from the discharge date, or

 

•

4 years from the dismissal date.

 

 

Exceptions for Extenuating Circumstances – All Bankruptcy Actions 

2-year time period from discharge date. No exception to the 2 year time period for Chapter 13 bankruptcy actions. 

The 2-year time period will be measured from the bankruptcy discharge or dismissal date. No exceptions are permitted to the 2-year time period after a Chapter 13 discharge. 

 

Multiple Bankruptcy Filings 

No existing policy 

5-year time period from most recent dismissal or discharge date required for borrowers with more than one bankruptcy filing within the past 7 years. 

 

Exceptions for Extenuating Circumstances – Multiple Bankruptcy Filings 

No existing policy 

3-year time period from the most recent discharge or dismissal date 
 
Note: The most recent bankruptcy filing must have been the result of extenuating circumstances.  

 

 

 

 

 

 

 

 

Thank you,

 

Michaela Johnson

Gateway Mortgage Group, LLC

14850 Quorum Drive

Dallas, TX  75254

michaela.johnson@gmos.us

Office - 972-908-3390, x153

Fax - 918-858-7554