August 26, 2016
There are many questions about FHA loans and bankruptcy. Here’s an example of the kinds of questions we answer on a regular basis about becoming eligible once more for an FHA mortgage in the wake of a bankruptcy discharge:
“My credit score is low and I will be discharged from bankruptcy coming this November. What can I do to raise my credit score and qualify for a FHA loan?”
It’s very important for borrowers in this situation to know that FHA loan rules in HUD 4000.1 require a minimum waiting time (also known as a ‘seasoning period’) before a borrower can apply for an FHA mortgage.
This waiting time begins at the time the bankruptcy is discharged, not from when it was initially filed. The waiting time depends on the type of bankruptcy, but in general borrowers can expect to wait between 12 and 24 months after the discharge of their bankruptcy.
During the seasoning period, FHA loan rules require the borrower to have established new credit and performed satisfactorily with on-time payments, but the rules also make provisions for those who choose not to establish new credit obligations. The on-time payment issue in the wake of a bankruptcy is critical, so borrowers should be prepared to meet all new financial obligations on time, every time in order to maximize chances for a new loan.
The reader mentions low credit scores. While FICO scores are not the only criteria for loan approval, credit scores are an important part of that equation. Reestablishing good credit is a crucial part of recovering from a bankruptcy in general, and borrowers can get help with pre-purchase planning including advice on how to prepare financially for a new loan.
This help is available by calling the FHA at their toll-free number (1-800 CALL FHA) and requesting a referral to a local, HUD-approved housing counselor or counseling agency.
Borrowers should avoid paying money to certain third-party “credit repair” agencies who may not actually be able to provide much lasting help for a borrower to prepare for a new home loan.
The government agency, The Consumer Financial Protection Bureau, offers some good advice on how to avoid being taken in by credit repair scams. Learn how to avoid being taken in by companies that aren’t actually trying to help you at the CFPB official site. (One warning sign is a requirement for you to pay before any services are rendered.)
The time between the bankruptcy discharge and your new application for a home loan is an opportunity to rebuild credit and become more creditworthy. It’s important to recognize the “seasoning period” is intended in part for a borrower to do just that and learn how to become a good credit risk.