Did you know that a Chapter 7 or 13 Bankruptcy does not exclude a borrower for using a HECM for Purchase (H4P), a form of Reverse Mortgage, from purchasing a home?
Chapter 7
A Chapter 7 liquidation does not disqualify a borrower for a HECM for Purchase if, at the time of case number assignment, at least two years elapsed since the date of bankruptcy discharge. During this time, the borrower must have:
- Reestablished good credit
- Not incurred new credit obligations
If a period of less than two years, but not less than 12 months has elapsed, the borrower might be eligible if he or she:
- Can show that the bankruptcy occurred due to extenuating circumstances beyond the borrower’s control.
- Has exhibited a documented ability to manager financial affairs responsibly since the bankruptcy discharge.
The lender obtains additional documentation if the credit report does not verify the discharge date, or if additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy. The lender also documents that the borrower’s current situation indicates that the events leading to the bankruptcy are not likely to recur.
Chapter 13
A Chapter 13 bankruptcy does not disqualify a borrower from consideration for a HECM for Purchase if the case number assignment occurs after at least 12 months of the bankruptcy pay-out period has elapsed.
The lender determines that, during this time, the borrower’s payment performance has been satisfactory, and that all required payments were timely. The borrower must also provide written permission from the bankruptcy court to enter into the mortgage transaction.
The lender includes the payment amount in the court-approved payment plan as an expense during the income calculation.
The lender obtains additional documentation if the credit report does not verify the discharge date, or if additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy. The lender also documents that the borrower’s current situation indicates that the events leading to the bankruptcy are not likely to recur.
For any additional questions, please reach out to me at Trust Mortgage.
