California FHA Loans after Foreclosure, Bankruptcy, Judgment and Collection

In this post I am talking about eligibility guidelines for a FHA Loan after you have gone through Judgment, Collection, Bankruptcy or Foreclosure. This applies to residents of California, Washington, Oregon and rest of the country.

FHA Loan after Collection and Judgment:

FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.

Exception: An exception on a court-ordered judgment may be made if the borrower

• has an agreement with the creditor to make regular and timely payments, and
• has provided documentation indicating that payments have been made according to the agreement.

Note – The guideline about the collection has changed on April 1, 2012. Read the update by clicking here.

FHA Loan after Foreclosure:

A borrower is generally not eligible for a new FHA-insured mortgage when, during the previous three years

• his/her previous principal residence or other real property was foreclosed, or
• he/she has given a deed-in-lieu of foreclosure.

Exception: The lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure. Divorce is not considered an extenuating circumstance. However, the situation in which a borrower whose loan was current at the time of a divorce in which the ex-spouse received the property and the loan was later foreclosed qualifies as an exception.

Note: The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

FHA Loan after 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. During this time, the borrower must

• have reestablished 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.

Note: The lender must document that the borrower’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 that the lender documents that

• one year of the payout period under the bankruptcy has elapsed, and
• the borrower’s payment performance has been satisfactory and all required payments have been made on time.

The borrower must receive written permission from the court to enter into the mortgage transaction.

Note: Exceptions to the guidelines are largely subjective and is based on the interpretation of the underwriter. Also, some of the lenders may not allow exceptions even if there are documentation to prove extenuating circumstances. Make sure to provide complete and accurate information to the lender at the time of loan application.

Related Post - FHA Loans after a Short Sale