We are often asked about FHA loan rules governing home loans for those with a bankruptcy on their credit reports. These types of questions vary, but often feature a common theme:
“I had a bankruptcy discharged in July 2014. How long do I have to wait to purchase another home with 10% down payment with a credit score of 590?”
After a bankruptcy is discharged, rebuilding good credit is one of the most crucial issues related to this question. A borrower must work hard, post-bankruptcy, to establish the best credit possible in order to qualify for a new home loan.
You may find that participating FHA lenders are willing to work with borrowers with credit scores starting at around 620 or higher. That FICO score of 620 is not listed in HUD 4000.1 as the FHA minimum required credit score, but this standard seems to be consistent among many financial institutions.
The minimum required wait time between having a bankruptcy discharged and being able to apply for a new FHA mortgage is known as a seasoning period. How long you must wait to apply for a new home loan following bankruptcy depends on type of bankruptcy. The rules governing this are found in HUD 4155.1 Chapter Four. There, we learn:
“A 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.
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Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy. If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter.”
Based on the quotes above, it’s easy to see that there are additional requirements. Getting an FHA loan following Chapter 13 is a more complex process than applying for a home loan following the discharge of a Chapter 7 bankruptcy.
However, no matter which type you come to the home loan process with, the borrower must be prepared to show a pattern of best practices when it comes to credit history following the bankruptcy.