July 11, 2023
There is a common reader question that goes something like this:
“I had a bankruptcy discharged recently. How long do I have to wait to purchase another home? I have been working on my credit and improving my scores.”
Post-bankruptcy, a borrower must work hard to establish the best credit possible in order to qualify for a new home loan. Lenders may be willing to work with borrowers with credit scores starting at around 620 or higher.
But credit isn’t the only factor determining how soon after bankruptcy you can apply for a home loan.
The nature of a borrower’s wait time to apply after bankruptcy depends on the nature of the bankruptcy.
The rules governing this are found in the FHA Single-Family Lender’s Handbook, which advises that bankruptcy “does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have
• re-established good credit, or
• chosen not to incur new credit obligations.”
FHA loan rules add that less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower:
• Shows that the bankruptcy was caused by circumstances beyond their control;
• has since handled financial affairs in a responsible manner and has documentation to prove it.
FHA loan rules require the lender to document “that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”
It is important to point out the amount of lender discretion permitted in the above–the financial institution’s standards will play an important part in borrower approval.
FHA does have lower minimum credit score requirements than many lenders, but this does not mean a lender’s higher standards won’t be a factor.
FHA loan rules permit the borrower to have higher standards than the minimums, provided they are administered according to federal law.
Chapter 7 and Chapter 13 bankruptcies have different issues, and your requirements may vary depending on what type of bankruptcy you filed. In any case, the lender, state law, and FHA guideliners have the final say over what is acceptable and what isn’t for loan approval purposes.