FHA Refinance After Bankruptcy and Loan Modification
by Wendy from Fredericksburg, VA and by Cheryl from South Windsor, CT
Ask Kate about FHA refinance after bankruptcy and mortgage loan modification: Wendy's bankruptcy was discharged over 4 years ago. Her mortgage has been paid on time since her loan modification more than a year ago. She asks when she will be eligible to refinance her current FHA home loan.
Ask Kate: When Am I Eligible for FHA Refinance Following Bankruptcy and Loan Modification By Wendy from Fredericksburg, VA
It has been 4 and 1/2 years since my bankruptcy was discharged.
Also, 14 months ago I was able to negotiate a loan modification with my current primary note holder.
I have been on time with monthly payments for 14 months now.
Under current FHA guidelines, how long do I have to wait before I can refinance my home?
Kate's Answer: When Am I Eligible for FHA Refinance Following Bankruptcy and Loan Modification
Congratulations on recovering from the bankruptcy and timely payments after modifying your mortgage terms. That's wonderful. I'm happy to hear that your home has become more affordable!
Now let's discuss the FHA guidelines for refinancing following bankruptcy and loan modification.
FHA Refinance After Chapter 7 Bankruptcy
FHA financing guidelines state that at least two years must pass after a Chapter 7 liquidation bankruptcy is discharged before a borrower is eligible for FHA financing.
Following the bankruptcy, newly established credit (such as car loans or credit cards) must have been paid satisfactorily without any late payments.
Theoretically, the borrower is not required to have opened new accounts. However, FHA adds that the lender must document that the borrower is now financially responsible. This is a bit vague and leaves it open to underwriters (the employee with the authority to grant loan approval) to interpret the guidelines. In turn, this leads to a thorn-in-the-flesh for borrowers and mortgage originators alike, lender overlays
FHA Exceptions After Chapter 7 Bankruptcy
But how about the person who wants to refinance a mortgage before two years have elapsed since the chapter 7 bankruptcy? There are two guidelines to note in this case. One year must have passed. Additionally, the homeowner must be able to document that the bankruptcy was beyond their control and the problems that caused it have been solved.
Here is an example I have given over the years. A family's primary wage earner loses a job and can't afford health insurance. Soon afterward, a family member becomes seriously ill. A bankruptcy follows after the medical bills eat through savings and threaten their existence.
FHA Refinance After Chapter 13 Bankruptcy
Although Chapter 7 is the most common form of bankruptcy, let's also talk about Chapter 13 Bankruptcy (wage earner's plan) as it relates to refinancing with an FHA home loan.
Because it takes several years for the discharge of a Chapter 13, many borrowers think they must wait until the completion to be approved for FHA financing. However, FHA financing is sometimes approved as early as one year into the bankruptcy.
Of course, there's an if
. The scheduled payments must be documented that they were made on time and the bankruptcy trustee must agree to the refinancing.
FHA Refinance After Mortgage Loan Modification
What about a waiting period for FHA refinancing after loan modification? If the loan servicer modified your mortgage using the Making Home Affordable's HAMP program
, the refinance can close after the first month following the HAMP trial payment period.
But in the case of modification using a lender's in-house program instead of HAMP
, the homeowner must wait until 3 modified payments have been made. The loan must also be current at the time of application.
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