October 26, 2021

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FHA Loans and Non-Existent Credit After Bankruptcy: A Reader Question


A reader asks, “My wife and I filed chapter 7 and lost our homes to foreclosure in 2009 after having lost our mortgage company in the crash of 2008. We haven’t needed credit and haven’t borrowed any money since. Our bank pulled our credit and found we have “no score” because of not having borrowed in the last 5.5 years. What would we have to do to get an FHA mortgage?”

According to a Frequently Asked Questions section of the FHA official site, borrowers who have a Chapter 7 Bankruptcy in their credit history should know the following information:

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations.”

So far, so good for the purposes of this reader’s question, but the FHA official site also tells us, “The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.”

FHA loan rules also state that the lender, “must document that the borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur.”

So much depends on three factors here–the borrower’s handling of his or her financial affairs since the bankruptcy, the lender’s willingness to work with a borrower who has chosen not to use credit again since the time of the Chapter Seven, and whether the lender can determine that the circumstances that led to the bankruptcy are not likely to occur again.

Borrowers should know that cases such as these are handled on an individual basis, so the borrower should try to work with the lender or find a lender willing to work with the circumstances described here.

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

Joe Wallace - Staff Writer

By Joe Wallace

January 30, 2015

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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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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