First, here are FHAâ€™s guidelines regarding bankruptcy:
E. Bankruptcy. 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. Additionally, the borrower must have reestablished good credit or chosen not to incur new credit obligations.
The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.
Additionally, the lender must document that the borrowerâ€™s current situation indicates that the events that led to the bankruptcy are not likely to recur.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrowerâ€™s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.
If your borrower has a bankruptcy that is less than 2 years but more than 12 months old and you want to try for the â€œextenuating circumstancesâ€ provision, keep in mind that many extenuating circumstances which would be acceptable to explain a few late payments will not be good enough to avoid waiting 2 years after a bankruptcy. The extenuating circumstance here must truly be a catastrophic experience, such as the death of a primary wage earner. It also cannot be a situation where the borrower filed a bankruptcy over a small amount of debt that the underwriter might feel they should have toughed out and paid.
Some lenders actually have stricter requirements and will look into the details of the bankruptcy. For instance, even if the time required has already passed but it looks like the bankruptcy was filed over a relatively small amount of debt which the borrower could have paid off with a little sacrifice the lender may require an automated approval before granting the mortgage. Of course, some lenders are much more lenient than others. In your own mind, just use common sense to make sure you are dealing with a borrower who really has gotten over their problem and is unlikely to repeat it.
Hope that answers your question. Any more questions, give me a call at 949-870-2882.