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Bankruptcy: The Impact on New FHA Loans in Orange County, CA

Bankruptcy and It's Impact on New FHA LoansBankruptcy is defined as a legal protection from creditors to those who are unable to pay their debts. A bankruptcy is a serious credit action and will stay on your credit report for 7-10 years depending on the type filed. Naturally it will also impact an Orange County resident’s ability to purchase another home. However, the impact is not nearly as great as many think.

There are many types of bankruptcy, but for individuals the Chapter 7 and Chapter 13 bankruptcy are the two most common. The difference between the two is important. With a Chapter 7 bankruptcy your debts are forgiven. However, the credit report will reflect this record for the next 10 years. With a Chapter 13 bankruptcy you enter into a repayment plan with your creditors. Typically this plan will take 2-3 years but can go as much as 5 years. A Chapter 13 bankruptcy is commonly removed from your credit report after 7 years, but can go as long as 10 years.

Now how does this impact your ability to get an FHA mortgage? The general guidelines state that you’ll need to wait at least 2 years from the date your bankruptcy was discharged to be able to apply for a new home loan. However, there are exceptions to that.

With a Chapter 7 bankruptcy, FHA will allow an Orange County resident to apply for a new home loan if they meet the following criteria:

  1. Must have re-established credit after the bankruptcy. No late payments or derogatory credit since date of discharge will be allowed.
  2. Provide a letter that explains the reason for the bankruptcy.
  3. Provide evidence that the bankruptcy was the result of extenuating circumstances. Extenuating circumstances are defined as: death or serious illness of a primary wage earner.

In order to apply for a new home loan in less than 2 years with a Chapter 13 bankruptcy, Orange County residents must meet the same criteria above as well as the two items below.

  1. Must have permission from the court.
  2. Must have made 12 on time payments to the court trustee.

If you meet these criteria then you can apply for a home loan. You will still need to meet the other FHA guidelines for approval. Since the bankruptcy is less than 2 years old the underwriter will review the file thoroughly. In addition, your debt-to-income ratio limits will be capped at 43%. Take a quick read through FHA’s credit guidelines for more information regarding derogatory credit and how it will impact your loan application.

Bankruptcy is tough. No one sets out with bankruptcy as a goal. But it happens. We all have challenges in life and surely it’s not a decision that is made lightly. But bankruptcy is an event. It does not define who you are. If you experienced the pain of a bankruptcy but are committed to re-building then I suggest getting help. If you’re reading this blog, then I’m assuming that home ownership is your goal. I would be honored to be the one who helps you put the past behind you. As a lender, I’ll help you create a plan that will get you back into a home of your own. So, let’s talk. I would be happy to review your individual situation and help you plot a new course.

Scott Storace

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