September 24, 2021
Those looking for home loans in the wake of a Chapter 13 bankruptcy often get conflicting messages about when, how, and even whether they can apply. Circumstances and causes of bankruptcy may vary, but borrowers often ask the same kinds of questions about what their options are after the proceedings are done.
A typical version of such questions may go like this: “I had a bankruptcy that was discharged and I was told I needed to wait two years before I can apply for an FHA loan. But other sources say I have to wait longer. What is the reality? How long do I have to wait to apply?”
What follows is advice about how long you might have to wait but keep in mind that the clock starts ticking on that waiting period when the bankruptcy is DISCHARGED, not when it was FILED. There is a major difference.
The answer to the “how long to wait” question about home loans depends greatly on who is giving out the information. FHA loan rules in HUD 4000.1 state clearly that a borrower may be considered eligible to apply (note that this is NOT a promise of loan approval) after a year has elapsed under certain conditions.
“A Chapter 13 bankruptcy does not disqualify a Borrower from obtaining an FHA- insured Mortgage, if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed.”
“The Mortgagee must determine that during this time, the Borrowers 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.”
There are a few caveats tucked into that paragraph including the need to get court permission where applicable. So are all applicants able to apply under such conditions? Not necessarily.
But why?
This is where lender standards may play an important part in things. A lender is free to apply a more strict requirement in cases of bankruptcy or other negative credit events, as long as those standards are applied in accordance with the law. The lender may have additional rules, or simply stricter ones.
And the borrower’s credit activity following the bankruptcy action could also determine whether or not they are eligible to apply for a new mortgage loan. The borrower who has established reliable repayment patterns following a Chapter 13 has a much better chance at loan approval than someone who has not.
That is not to say that the reader in this case has or has not performed satisfactorily in this area, but rather to impart that such issues are a factor in whether the borrower will be approved for a new loan.
A loan application processed after a bankruptcy has been discharged will be reviewed on an individual basis–there is no one-size-fits-all approach to bankruptcy issues as your personal circumstances will be taken into account.
The lender wants to know you are a good credit risk now–the way to do that is to begin rebuilding credit with on-time payments, low credit utilization (credit card balances under 30%), and a good balance between your outgoing debt and your monthly income.
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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