Is a home loan in the wake of bankruptcy an impossible dream? In many cases, no, it’s not. But a potential borrower looking to start house hunting again after a Chapter 7 or Chapter 13 bankruptcy has been discharged should know about some rules that will apply in such cases.
Do you know what they are?
Some borrowers, including first-time home buyers, assume that after a Chapter 7 or Chapter 13 bankruptcy filing it is all but impossible to get a participating FHA lender to consider a loan application. It’s a mistake to count yourself out of the running to apply for a new home loan.
Some people wrongly assume you must wait seven years or longer to apply for a new mortgage after bankruptcy. FHA home loan rules indicate you do NOT have to wait that long.
What do you need to know about applying for an FHA mortgage with a bankruptcy on your credit history?
The biggest thing you should know upfront? The date your Chapter 7 or Chapter 13 bankruptcy was discharged. Not the initial filing date, but the discharge date. This is the date your lender will look at to determine if you must wait a bit longer to apply or if you are eligible NOW.
FHA home loans are permitted after the bankruptcy has been discharged, and the date after they have been initially filed is not a consideration.
Why is the discharge date so crucial? It’s simple, really–when your bankruptcy has been discharged, there is a mandatory waiting time–the seasoning period–you must wait before you can apply for a new mortgage again.
In some cases a full year is needed, in others, two full years may be required. Your lender’s standards will also play a role in this waiting period. State law may also have a say.
In typical cases, a borrower may be required to provide documentation to the lender to show that the bankruptcy was due to things beyond your control.
The idea here is to communicate to the lender that those circumstances will not repeat. And in some bankruptcy cases you may need the court’s permission to apply for the new mortgage–ask your loan officer what circumstances may require that.
Your FHA lender will be required by the rules in HUD 4000.1 to collect evidence that the bankruptcy isn’t likely to happen again. FHA loan rules state the lender must “document that the Borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”
Remember, not all participating lenders have the same standards–it pays to shop around for a home loan lender who can work with your circumstances.