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FHA Loan Reader Questions: Chapter 7 Bankruptcy

FHA DISCRIMINATION SETTLEMENT

A reader asks, “I have a Chapter 7 and I want to apply for a FHA home loan. If my scores are in the high 600′s or 700′s? Do I still have to wait two years after my bankruptcy has been discharged to apply?”

FHA loan rules on the subject of getting a loan after a Chapter 7 bankruptcy filing are found in HUD 4155.1 Chapter Four, Section C. The FHA loan rules say borrowers with a Chapter 7 on their credit record are not automatically barred from getting an FHA mortgage, but the following applies:

“A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have

• re-established good credit, or
• chosen not to incur new credit obligations.”

The two year minimum waiting period may, under FHA loan rules, be shortened in some cases. However, this is an FHA rule and your lender may have different, higher standards. According to Chapter Four:

“An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

  • can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
  • has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

    Note: The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”

Again, the lender is not REQUIRED to shorten this waiting period even if all the above conditions exist and the borrower is technically eligible to get an FHA mortgage in shorter than two years after the bankruptcy. It’s also important to note that the two year waiting period is set in motion once the bankruptcy has been discharged–not when it was FILED.

FHA loan minimum requirements are just that–minimums. A lender is free to apply higher standards to all applicants as long as the higher standards are consistently applied and done so in accordance with fair housing rules.

Do you have questions about FHA home loans? Ask us in the comments section.

10 Responses to FHA Loan Reader Questions: Chapter 7 Bankruptcy

  1. marty says:

    yes i filed chapter 7 in april 2011,i was discharged i believe in aug 2011,i had ahome that was in the bankruptcy that was sold at courthouse in july 2012,whendoes the 2 years wait start at when the home changed names at time of being sold or at time of discharge? thanks

  2. D.L. Morroe says:

    I have been told the waiting period to get a new mortgage is three years after the lender takes back title to the house if it was included in the chapter 7 bankruptcy. My bankruptcy was discharged Nov 2010 but the lender took title in Mar 2012. When can I get a new mortgage?

    • Joe Wallace says:

      Were you told this by a lender? The bank’s standards may apply in such cases depending on the circumstances.

  3. JOANNE SAMUEL says:

    I like the previous comment filed bankruptcy in March of 2010 and was discharged in July of 2010. I applied for and was told that i had to wait for 3 years from the date the loan was paid off.

    They said that date is 12/10/2012 from when the loan was paid off which makes it 12/10/2013. That makes it 3 years.. Doesn’t the guidelines says 3 years?

  4. Gina Hunt says:

    I filed chapter 7 in March 2010 and dischared in June 2010. I had a home included in the bankruptcy but after the two year waiting period the lender told me I had to wait an additional three years from the time of the final sale of the property which was not until March 2013. So are they correct in stating that it is a five year waiting period before I can qualify for an FHA loan?

    • Joe Wallace says:

      The lender’s standards would apply as well as FHA loan standards. Many lenders might require longer seasoning period wait times than the FHA minimums, depending on the circumstances.

  5. Sarah G says:

    Hello,
    I filled for a Ch. 13 in March 2009, then converted it to a Ch. 7 which was discharged in March 2012. The only reason I filed 13 originally was because I needed to protect my car, but then that wasn’t an issue so I converted to 7 so I could get it discharged. This may have not been the best idea, but what is done is done. I would like to buy a house, but was told I had to wait 2 years from the March 2012 date by a mortgage broker I called. I have worked to repair my credit since then and have incurred no more dept other than a small credit limit credit card that I was using to build new, good credit. I have a good job with good pay in education, with solid 2 years of increased income and have signed a contract for another year. What process should I take to try and qualify for an FHA loan under the 2 year wait period after bankruptcy?

    • Joe Wallace says:

      You would need to discuss your situation with the loan officer to learn what standards that lender has for borrowers in your circumstances.

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