e. Bankruptcy (continued)

Petition Under Chapter 13 of the Bankruptcy Code

This type of filing indicates an effort to pay creditors.  Regular payments are made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to pay off scaled down or entire debts.

If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit.

If the applicant has satisfactorily made at least 12 months’ worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.

f. Foreclosures

The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.

·   Develop complete information on the facts and circumstances of the foreclosure. 

·   Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law.  See the preceding heading entitled “Bankruptcy.”

If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan.  Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.