Chapter 13 Bankruptcy and Rebuilding Credit For Dallas Homebuyers

CHAPTER 13 BANKRUPTCY AND REBUILDING CREDIT FOR DALLAS HOMEBUYERS

Over the weekend, I received a letter from a gentleman who found my Chapter 13 bankruptcy blog online and had a few more specific questions. So i decided to post the questions and answers here (with his permission, of course) for everyone to see.

Here's a list of the questions (in bold):

"Hello John- Your chapter 13 and FHA loan article is very concise and helpful. A few additional questions- When opening at least 3 new credit lines should they be a combo of installment and revolving with low or high balances from month to month? "

I would recommend getting two revolving accounts and one installment account to even out the mix. 10% of your credit score is based on having a fair mix of credit, so two revolving and one installment account should do the trick. As far as the balances, there's no need to keep a high balance on the credit cards. In fact, this can hurt in the long run because a significant part of your credit score is determined by debt to limit ratios for each open account. Ideally, i would recommend keeping the balance of the credit cards below 25-50% of their respective limits at all times.

"And... We are in a chapter 13 ( five year plan and currently on month 19) My wife has been on her salaried job for 19 years and I am just starting a new salaried job. Have been out of work for 9 months yet the new job is what I did before- Does FHA still require a full 2 years for me or less time to qualify?"

FHA does require a two year employment history. However, an underwriter may grant an exception to this rule if the job loss was due to factors beyond your control and if the new job is comparable to the previous job. FHA will still want a full two year work history, so they will just require documentation of the previous two years before the nine month job loss. Going from a salaried job to another salaried job is just fine. If you would have started your own business this go-round, FHA would have required a two year history of earnings for the new business.

If we wait for the Chapter 13 to run its full 60 month course can we apply for an FHA loan the day after? It seems odd that one can apply for a FHA loan while actually in a Chapter 13.

I agree it seems odd, but it's the truth. FHA does allow a borrower to obtain an FHA loan even if they're currently in a Chapter 13 bankruptcy. However, there are a few guidelines and requirements that must be met:

• The borrower must have made at least 12 months of timely payments in the Chapter 13 repayment plan.
• Payment history on accounts not included in the bankruptcy must be near perfect. This is ultimately an underwriter's call, but they are typically very strict with regards to payment history for all accounts once a bankruptcy has been filed.
• The borrower must meet all other underwriting requirements to obtain an FHA loan (acceptable job history, debt-to-income ratios, cash reserves, credit score, etc). A loan officer and underwriter will make this determination.
• The bankruptcy trustee must give written permission for the borrower to obtain a mortgage. This is true for both purchases and refinances. To the best of my knowledge and based on my past experiences, there are no specific guidelines for this, but the trustee will generally not approve a request to increase the current payment by very much if any at all. For example, a person who pays $1000 per month for rent would likely be restricted from purchasing a home with a mortgage of over $1000 per month. An exception could possibly be made in cases where a specific and compelling need to increase the size of the family home due to a chance in familial status is present (such as an elderly parent having to move in with the family or the birth of a new child). If you have specific questions, please contact the bankruptcy trustee directly.

Once the bankruptcy is completed (discharged) and all payments have been disbursed to creditors, you may apply for an FHA loan without having to obtain a letter of permission from the bankruptcy trustee. But as I mentioned above, it may be possible to obtain a mortgage prior to discharge of a Chapter 13 bankruptcy. This may or may not be a good idea, depending on your individual financial situation.

It's very important to focus on rebuilding your financial strength both during and after a bankruptcy. Ideally, a buyer should try to save at least twelve months of cash reserves in addition to the money needed for down payment.

Also, make sure to keep all records pertaining to the bankruptcy, including the full petition, discharge and especially the record pf payments to the trustee. It's not uncommon to see errors on accounts that have been included in a bankruptcy because the creditor did not note the account as included in a bankruptcy.

Feel free to email me with any specific questions related to this or any other issue regarding credit, mortgages or real estate in the Dallas / Fort Worth area.