July 29, 2013
A reader asks, “I filled for a Chapter 13 bankruptcy in March 2009, then converted it to a Chapter 7 which was discharged in March 2012. 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?”
FHA loan rules on Chapter 7 bankruptcy are clear. These rules are found in HUD 4155.1 Chapter Four, Section C, which can be accessed at the FHA official site at FHA.gov. Chapter Four says:
“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.”
Note that the rules state that two years must elapse from the time the bankruptcy is discharged, not when it is FILED. The two-year minimum could have exceptions in certain cases according to Chapter Four. FHA loan rules for exceptions to the two year waiting period include the following:
“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.”
Notice that the FHA loan rules do not REQUIRE the lender to offer a shorter wait time; this shortened “seasoning period” is at the lender’s discretion and the borrower should be prepared to show, in writing, the required proof mentioned in the rules above. A borrower who has at least one year of on-time payments and has documented the same may have a much better chance at finding a lender willing to consider an FHA mortgage as long as the lender’s other standards are met.
Do you have questions about FHA loans? Ask us in the comments section.
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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