The Federal Housing Administration (FHA) specializes in insuring loans for qualified borrowers who have issues that exclude them from conventional loan programs, such as less than perfect credit histories. While subprime loans also cater to this type of borrower, FHA loans offer market-competitive interest rates and terms much lower than those of subprime loans. FHA lenders require minimum credit scores as well as down payments.
When you choose to file for bankruptcy, the type of bankruptcy you choose affects your credit score as well as the length of time it will take before your next home purchase. This discussion of FHA and bankruptcy alternatives will give you essential background information when you are considering bankruptcy. Filing for bankruptcy will cause your credit score to plummet and make it difficult to obtain future credit.
Results of Mortgage Default
Defaulting on your mortgage is likely to trigger a credit cascade failure. If you have credit cards the interest rates may rise by as much as 30% and car loans will be more challenging to obtain. Mortgage loans will be vastly more difficult to secure.
The FHA makes you wait at least 2 years after a bankruptcy discharge before it will insure a new mortgage. You must also bring your credit score up to acceptable levels and have a minimum down payment of 3 .5 to 10%. Jay Zagorsky, a research scientist at Ohio State University, believes that most of those who experience foreclosure will again become homeowners.
Fannie Mae has recently lengthened the time that must elapse between a foreclosure and approval for a new mortgage. FHA loans are more challenging to obtain than they have been in the past, with more demanding credit score requirements. Applicants are expected to have a credit score of 580 or better. Those with scores of 500 to 579 are required to make a 10% down payment.
Applicants who have a minimum credit score of less than 500 are not eligible for FHA mortgages. Those with credit scores of 500 or better are eligible for 100% FHA loan financing with no down payment when using the FHA 203(h) program, Mortgage Insurance for Disaster Victims.
Under Chapter 7 you are still obligated to pay the mortgage on your home. As in most cases, the lender can foreclose if your payments are not up to date. Additionally, most mortgage loan documents provide that if a borrower’s personal liability under the mortgage is discharged through bankruptcy, then the lender has the automatic right to foreclose. You may be able to avoid foreclosure by signing a mortgage loan reinstatement after your bankruptcy ends. This effectively renews your mortgage, so the lender won’t foreclose, but it also renews your personal liability on the mortgage.
In Chapter 11 consumer bankruptcy, you can keep your homes, eliminate additional mortgages completely and reduce balances on other secured debts.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy requires a court-ordered repayment schedule for debt repayment while doing less harm to your credit than Chapter 7, providing that you diligently comply with your court-ordered repayments. When you select this type of bankruptcy, the FHA only requires a 12-month wait from the date you began making your payments. This is a fast path to regaining solvent homeownership. You must also have court permission in order to obtain the new mortgage.
Qualified borrowers with a past bankruptcy can qualify for FHA loans under certain conditions. Paying debts on time, establishing a secured credit card, and obtaining one high balance loan such as a car loan can jump-start your credit recovery. Selecting a New York attorney skilled in bankruptcy matters, such as The Law Office of Stephen B. Kass P.C., can help set you on the fast track to your next home with the bankruptcy strategy that’s best for you.
