August 17, 2017

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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.

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