A reader asks, “What is the length of time after filing bankruptcy that you have to wait to qualify for a FHA loan…during that waiting process what are some of the things that I should be doing to make the approval process easier and making my credit better?”
FHA loan rules and lender standards are both considerations in situations like these, as is the specific circumstances of the individual’s bankruptcy and other credit issues. Borrowers should know that FHA minimums are just that–minimums. Lenders can and often do require higher standards.
That’s why it’s important to consider shopping around for a lender who may be more willing to work with you–one lender may not be able to help, while another can depending on your situation. For the record, FHA loan rules for bankruptcy vary depending on whether the filing was Chapter 7 or Chapter 13. For Chapter 7, FHA loan rules in HUD 4155.1 say 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.”
The two year minimum waiting period may, as described in FHA loan rules, be waived depending on circumstances. Keep in mind that, as mention above, his is an FHA rule and your lender may have stricter standards. According to Chapter Four of HUD 4155.1:
“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.”
FHA loan rules add the following note to this section, stating: “The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”
For Chapter 13 bankruptcy, the FHA loan rules say that Chapter 13 bankruptcy does not “disqualify a borrower from obtaining an FHA-insured mortgage provided that the lender documents that:
• one year of the pay-out period under the bankruptcy has elapsed
• the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
• the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.”
FHA loan rules add a very imporant note to the above, which borrowers should pay close attention to–“Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.”
The FHA has issued guidelines for some leniency that may be applicable for qualified borrowers under the Back To Work program–speak with a loan officer to see if your circumstances qualify and to learn more.
Do you have questions about FHA home loans? Ask us in the comments section.