FHA loans after bankruptcy are possible, and there are many potential FHA loan applicants who are very curious what next steps are following a Chapter 7 or Chapter 13 bankruptcy proceeding in terms of becoming a home owner either again, or for the first time.
The most important things to remember about FHA loans after a bankruptcy is that some basic issues will affect your chances for a new home loan above and beyond the rules of your Chapter 7 or Chapter 13.
In addition to the guidelines you must follow depending on the type of bankruptcy you filed, FHA loan requirements, lender standards, and your own credit activity following the discharge of your bankruptcy will be crucial in determining your credit worthiness for the new mortgage.
Lender standards will vary from one company to another, and you will need to inquire with your chosen participating FHA lender to see what those standards are. From an FHA loan rulebook perspective, the basic requirements for qualifying for a new FHA mortgage after Chapter 7 or Chapter 13 are fairly simple.
The lender is required to document a minimum waiting period of two years since the discharge of the bankruptcy. Note that that the waiting period begins when the bankruptcy is DISCHARGED, not when it has been filed.
If less than two years have elapsed, the lender is required to “manually underwrite” the loan, which means additional documentation and other measures may be required. Manual underwriting is considered a “downgrade”, but it is not necessarily a deal-breaker.
That said, when manually underwriting the loan, the lender must insure the borrower has waited a minimum of 12 months, established satisfactory credit, and fully complied with the terms of the bankruptcy. In cases of Chapter 7, a full two-year waiting period is not required IF the borrower can show the bankruptcy proceedings were caused by circumstances beyond the borrower’s control.
In cases of Chapter 13 bankruptcy, the borrower may be permitted to apply after a minimum of 12 months if the borrower has made satisfactory progress on the bankruptcy requirements. According to HUD 4000.1:
“The Mortgagee must determine that during this time, 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.”
Lender discretion will play a part in determining whether the borrower is qualified to apply earlier than two years after the discharge of the bankruptcy.