November 7, 2013
A reader asks, “We filed Chapter 7 with a house 1 1/2 years ago. How long after bankruptcy do you have to wait I have been told 1 yr then 2 years now 3 years? I would like to buy a home again and I am trying to find out what I must do I was told by one lender that I must rent a home for one year and reapply for credit for also one year before I can apply for a mortgage is there any truth in this? Should I just try to apply for a pre-approval and see what happens and if I do will that hurt my credit score?”
The basic question about applying for an FHA home loan after a Chapter 7 bankruptcy has a fairly straightforward answer, based on this reading of the FHA loan rules:
“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.”
That’s the opening statement of HUD 4155.1 Chapter Four under the heading Chapter 7 Bankruptcy. This section adds a few caveats to the above–there are requirements the borrower must meet in most cases (with the possible exception of the FHA/HUD’s Back To Work program, which borrowers should discuss with a lender directly to see if there is any eligibility there based on circumstances).
According to Chapter Four, in the two years that have gone by since Chapter 7 was discharged, the borrower must have:
• re-established good credit, or
• chosen not to incur new credit obligations.
According to Chapter Four, an “elapsed period of fewer 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. The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”
So the answer is more or less straightforward in many cases. If the borrower meets these requirements, an FHA loan is possible. The availability of a participating lender and the borrower’s individual circumstances may affect the outcome of a loan application in these cases.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at www.FHA.com (a private company, not a government agency).
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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