Out of the Game? No way! You’re Just Getting Your Second Wind!


Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.”—quote from the character George Bailey. Capra, F.(1946) It’s a Wonderful Life, United States, RKO Radio Pictures Studio.

Welcome to 2014: Sometime after September, 2007, you suffered through a foreclosure. You filed a bankruptcy.  You endured the pain of a short sale or signed a deed in lieu and handed your house over to the mortgage company.  So now you are destined to be a renter for the rest of your life with no security for retirement, right? Not necessarily. Home ownership is not out of the picture. However, it will take hard work, attention to details, and the creation of a savings plan that works for you—any savings plan is a good start!

You’d be surprised to learn that the United States Federal Housing Administration (FHA) can provide a ray of hope through the mists of a stormy financial past.  However, the more useful information you have now, the better you can plan for success.  The following is a summary of a recent FHA article and some of my own helpful suggestions (in italics):

1.  NO CREDIT HISTORY: Two lines of credit are necessary to apply for an FHA loan. However, in the event you do not have sufficient credit on your credit report the FHA will allow substitute forms.

So, pay your living expenses timely, and start collecting the proof you’ll need in the form of utility statements, water statements, gas bills, lawn care, furniture rental bills, or doctor, dentist, or hospital statements, all of which show your timely payments.

2. CHAPTER 13 BANKRUPTCY: FHA will consider approving you even if you’re still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The court trustee’s written approval will also be needed in order to proceed with the loan. You will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.

Sit down with the proposed mortgage lender and “preview” the expected loan terms with them to assure that the mortgage looks like a smart deal to the Bankruptcy Court, then meet with your attorney.  That way, if the loan does not appear workable, you don’t waste your time or money seeking approval of a proposed mortgage loan that is not likely to be approved.

3. CHAPTER 7 BANKRUPTCY: At least two years must have elapsed since the discharge date of your Chapter 7 Bankruptcy, according to FHA guidelines. This is not to be confused with the bankruptcy filing date. A full explanation will be required with the loan application. In order to qualify for an FHA loan, you must qualify financially, have re-established good credit, and have a stable job.

Make sure to keep a complete copy of your bankruptcy paperwork and all documents you received from the Court, your trustee, your lawyer, and your creditors.  These documents will help you when dealing with the proposed mortgage lender.  Be prepared to explain what led to the bankruptcy filing in the first place and the changes in your life that have occurred since then that make a re-occurrence of such conditions unlikely.

4. LATE PAYMENTS: During an underwriter analysis of your credit, the overall pattern of credit behavior is being reviewed rather than isolated cases of slow payments. If a good payment pattern has been maintained, regardless of a specific period of financial difficulty preceded it, you may escape disqualification.

Make sure that you have looked at your credit reports (e.g., Equifax, Experian, TransUnion, et al.)  long before the mortgage lender does so that you can bring to the attention of these credit reporting agencies any errors/omissions on the reports as to payment history or other important account details.

5.  FORECLOSURE: FHA insured mortgages are generally not available to you if your property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. However, if the foreclosure of the your main residence was the result of extenuating circumstances, an exception may be granted if you have since established good credit. This does not include the inability to sell a home when transferring from one area to another.

Consider this provision very carefully and take a good hard look at whether or not there were extenuating circumstances concerning your foreclosure and what you are able to prove.  Always have back-up proof that supports your position.  

6. COLLECTIONS, JUDGMENTS AND FEDERAL DEBTS: A collection is minor in nature usually does not need to be paid off as a condition for loan approval. It is stated as such in FHA guidelines. Any judgments will have to be paid in full prior to closing. If you are delinquent on any federal debt, such as tax liens, student loans, etc., you are not eligible.

If you have not eliminated debts in a bankruptcy, then come up with a realistic plan to settle all of your long term debts. It is pointless to waste your time seeking approval for a mortgage if you know that you have “unfinished work” to do with your creditors.  Mortgage lenders LOOK AT EVERYTHING.  So, do yourself a favor and settle your differences with your creditors.  You may want to enlist a competent and reliable attorney to help you with this activity.   

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