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FHA Loans After Chapter 7 Bankruptcy: A Reader Question

July 25, 2013

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A reader asks, “I filed chapter 7 in March 2010 and discharged 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?”

FHA loan rules for FHA mortgages applied for in the wake of a Chapter 7 Bankruptcy are found in HUD 4155.1 Chapter Four, Section C, which states the following:

“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.”

Additionally, Chapter Four Section C says, “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.”However, borrowers should know that the lender’s standards may exceed FHA standards for waiting periods–this is acceptable to the FHA and permitted under FHA loan program rules. A lender may require a longer “seasoning period” following a Chapter 7 bankruptcy, so in the case of this reader question, it’s entirely possible that a five year wait might be needed for that particular lender in that particular circumstance.

Borrowers are always free to explore other options with other financial institutions–if you find a lender willing to work with you in your circumstances, you may find the FHA minimums are the only ones to worry about. Again, that’s given that you have a lender willing to observe those minimums only.

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

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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