Bankruptcy Dismissal Versus Discharge Mortgage Guidelines

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Bankruptcy Dismissal Versus Discharge Mortgage Guidelines

This BLOG On Bankruptcy Dismissal Versus Discharge Mortgage Guidelines Was PUBLISHED On September 9th, 2019

Bankruptcy Dismissal Versus Discharge Mortgage Guidelines
GCA Mortgage Group

There are strict waiting period requirements after Bankruptcy on government and conventional loans.

  • Consumers in debt can get the help of the United States Bankruptcy Courts for protection from creditors
  • Many consumers who file bankruptcy think it is the end of the world and may never qualify for mortgage
  • This is not true
  • Many who have financial hardships normally recover and can become homeowners again
  • However, FHA, VA, Fannie Mae, Freddie Mac have mandatory waiting period after bankruptcy discharged date
  • However, there are consumers who get a bankruptcy dismissal versus discharge
  • There are different Bankruptcy Dismissal Versus Discharge Mortgage Guidelines depending on the loan program
  • We will discuss Bankruptcy Dismissal Versus Discharge Mortgage Guidelines on this blog

Special thanks to Karen Cordes, Underwriting Director and SVP of Operations at Loan Cabin Inc. for the information and content on this blog.

How Underwriter Explains Bankruptcy Dismissal Versus Discharge Mortgage Guidelines

How Underwriter Explains Bankruptcy Dismissal Versus Discharge Mortgage Guidelines

According to Karen Cordes, underwriting director at Loan Cabin, she feels it is best to explain it like this. START with FHA 13 DISMISSAL regardless of the reason

  • In contrast to a bankruptcy discharge, after which collectors may no longer recover payments, a dismissal occurs when something goes awry and the case cannot continue toward a discharge
  • Bankruptcy fraud, missed payments and missed deadlines may cause a Chapter 13 bankruptcy to be dismissed
  • In some cases, the debtor may choose to opt for dismissal rather than continue with the case

THIS means the debts are still out there and have to be handled accordingly.

HUD Guidelines On Bankruptcy

HUD Guidelines On Bankruptcy

The United States Department of Housing and Urban Development (HUD) is the parent of FHA. The Federal Housing Administration (FHA) is not a lender. Its role is to promote home ownership to hard working Americans by insuring lenders who originate and fund FHA Loans. However, lenders need to follow HUD 4000.1 FHA Handbook Guidelines in order for FHA to insure the loans they originate and fund. Mortgage Underwriters need to specifically follow all FHA Guidelines in order for HUD to insure loans that default and goes into foreclosure. HUD Bankruptcy Dismissal Versus Discharge Mortgage Guidelines are part of rules and regs lenders need to follow.

HUD FHA Chapter 13 Manual Underwriting Guidelines

The FHA can insure a loan for a borrower after a Chapter 13 discharge if the borrower can meet the following guidelines:

    1. at least two years have elapsed
    2. the borrower has re-established good credit and made all payments on time since the discharge date
    3. The same two-year seasoning rule applies to a Chapter 13 dismissal, as of the date it was dismissed
    4. Again, the FHA underwriter must document that the borrower meets all HUD Guidelines

Manual Underwriting Downgrade On FHA Loans

If the dismissal has not been more than 2 year a manual downgrade applies to the file

  • The DE underwriter manually underwrites the loan, generally with more scrutiny
  • The borrower must submit a letter of explanation regarding the cause for filing the Chapter 13 and the reason for dismissal
  • Final approval or rejection is at the underwriter’s discretion
  • The underwriter will review all payments and history for 2 years and the borrower must have made all housing and installment debt payments on time
  • No major derogatory credit on revolving for previous 12 months( any 90 day late are majors and 3 or more 60 day lates) and for  previous 12 months AND may not have more 2×30 on all mortgages and installment in the last 24 months

Rule of thumb 0x30x12 and 2 x30 x24 on mtg and installment  and no major derogatory tradelines.

Mortgage Guidelines On Outstanding Collections And Charged Off Accounts

Keep in mind that collection accounts have to be documented with letter of explanations and supporting documentation. It must be consistent with the other credit information in the file and should have a 5% payment in them since they are still collectible.  Judgments are resolved or paid off prior to closing (or at closing with documented source of funds)

Extenuating Circumstances

HUD does not consider a divorce and extenuating circumstance:

    • it need to be beyond the control of the borrower
    • Neither is the inability to sell a home due to relocation or job transfer considered an extenuating circumstance

Bankruptcy Dismissal Versus Discharge Mortgage Guidelines On VA Loans

Bankruptcy Dismissal Versus Discharge Mortgage Guidelines On VA Loans

VA  generally follows FHA when it comes to bankruptcy dismissal versus discharge mortgage guidelines.

  • In a nutshell, borrowers can qualify for FHA and VA Loans after 12 months of payments during an active Chapter 13 Bankruptcy repayment plan via manual underwriting
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for FHA and VA Loans
  • Any borrowers who have their Chapter 13 Bankruptcy discharge seasoned for less than 2 years needs to be manually underwritten
  • Manual Underwriting Guidelines applies. VA and FHA bankruptcy dismissal versus discharge mortgage guidelines are the same

Bankruptcy Dismissal Versus Discharge Mortgage Guidelines On Conforming Loans

Bankruptcy Dismissal Versus Discharge Mortgage Guidelines On Conforming Loans

Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines.

  • Conforming Loans are not insured nor guaranteed by any government agency
  • Why do underwriters make sure conventional loans conform to Fannie and/or Freddie Guidelines?
  • Mortgage Bankers use their warehouse line of credit to originate and fund home loans
  • However, they do not want to hold the loans they fund for 30 years
  • The role of Fannie Mae and Freddie Mac is to purchase mortgages by lenders so lenders can relieve their warehouse line of credit so they can fund more loans
  • If home loans do not conform to Fannie Mae and/or Freddie Mac Guidelines, Fannie/Freddie will not purchase them
  • This leaves lenders holding the mortgages they fund in their portfolio which is not what they want to do
  • Bankruptcy dismissal versus discharge mortgage guidelines on conforming loans is not so forgiving

Conventional Mortgage Guidelines With Derogatory Credit

CONVENTIONAL is not so forgiving:

  • There is a four year waiting period after Chapter 7 discharged date
  • There is a four year waiting period after Chapter 7 and 13  Bankruptcy dismissal date to qualify for conventional loans
  • Only if extenuating circumstances can be documented there may be an exception to be considered by the underwriter
  • If extenuating circumstances is considered by underwriters, it measured from the dismissal date of bankruptcy action along with an approve eligible only to meet the master contracts that we can sell too

Special Thanks to Karen Cordes, Senior Vice President and Underwriting Director at Loan Cabin Inc. to be the contributing editor on this blog on Bankruptcy Dismissal Versus Discharge Mortgage Guidelines and Alex Carlucci, Senior Mortgage Banker at Loan Cabin for convincing Karen Cordes take time out of her busy schedule.

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