Law Office of Allan E. Dunaway, PLC

FHA changes requirements for borrowers with bankruptcy

The Great Recession was hard on many Kentucky residents in the Louisville area. The crash of real estate values coincided with the loss of many jobs, as businesses closed or laid-off workers. This left many people with homes that were worth less than their mortgages and it left them without sufficient income to continue making payments on the now overvalued mortgages.

The inevitable result for many borrowers was attempts to modify their mortgages, short sales, foreclosure and bankruptcy. While some may have hung on, filing a Chapter 13 bankruptcy, they may simply not had enough income to sustain their Chapter 13 plan payments and they eventually had to change their filing to a Chapter 7, and discharge their remaining debt.

Job loss can be a significant trigger for a bankruptcy filing, and for a family that is already living paycheck to paycheck, losing hours or a job, can cause a cascade of problems, as they attempt to juggle payments from the incessant demands of bill collectors.

Borrowers who have suffered an economic event beyond their control may still have had difficulty obtaining a new FHA mortgage because of the blemishes on their credit record, which had imposed a 3-year waiting period on potential borrowers.

The FHA has now changed its guidelines and now will accept evidence of a catastrophic event triggered by a job loss or a 20 percent drop in family income. The FHA "Back to Work" program good news for those who have been forced into bankruptcy by job loss or a reduction in hours.

Source:, "Home buyers may qualify for FHA loan despite short-sale or foreclosure," William E. Lewis, Jr., September 3, 2013

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