fha loan with bankruptcies

How to Get Approved for an FHA Loan After Bankruptcy

Dealing with bankruptcy can feel like the end of the world when it comes to finances and credit. But the truth is, filing for bankruptcy isn’t necessarily the credit death sentence it used to be. With some time and perseverance, you can rebuild your credit and get approved for major loans again. This includes FHA loans.

So if you’ve been through bankruptcy and need an FHA mortgage don’t give up hope. Here’s what to know about qualifying for FHA financing after bankruptcy along with tips for getting approved.

FHA Loan Guidelines for Borrowers With Bankruptcy

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA-approved lenders. This insurance protects the lender if the borrower defaults. Since the risk is lower for lenders, FHA loans can be easier to qualify for than conventional mortgages.

And FHA provides more flexibility regarding bankruptcies than other types of mortgages. Here are the key criteria to meet:

• Chapter 7 Bankruptcy – Must be discharged at least 2 years ago. You need to reestablish good credit or not take on new debts. In some cases, may qualify after 1 year with proof of extenuating circumstances.

• Chapter 13 Bankruptcy – Must have completed 12 months of on-time payments in your repayment plan. Also need court permission to take on mortgage.

• Manual Underwriting – If less than 2 years since discharge, loan requires stricter manual underwriting.

• Documentation – Lender must verify circumstances and that events leading to bankruptcy are unlikely to recur.

As you can see, FHA does make allowances for borrowers who’ve faced financial hardships. But specific guidelines must be met, and it takes time to rebuild credit. Patience and diligently maintaining good credit are vital.

Tips for Improving Your Chances of Approval

Getting approved for an FHA loan shortly after bankruptcy requires effort. Here are tips to improve your odds:

• Wait to apply until you meet the applicable FHA waiting period. Don’t rush it.

• Pay all current debts on time going forward to rebuild credit history.

• Limit new credit applications to avoid too many hard inquiries on your report.

• Maintain low credit utilization by keeping balances low compared to limits.

• Write a letter explaining the circumstances that led to your bankruptcy if applicable.

• Be prepared to make a larger down payment if your credit score is low.

• Shop with lenders familiar with approving borrowers post-bankruptcy.

• Ask lenders if you meet FHA requirements before submitting a full application.

• Complete credit counseling and housing counseling requirements if needed.

• Have money in reserves to show you can cover mortgage payments if issues arise.

With each on-time payment and year of positive credit history, your scores will gradually improve. Stay focused on demonstrating responsible money management and your chances of a new FHA mortgage approval will get better and better.

Should I Consider Alternatives to FHA?

Some prospective home buyers wonder if they’d be better off looking at non-FHA loan options after bankruptcy. Here are some pros and cons of alternatives to weigh:

Conventional 97

• Requires just 3% down like FHA.
• No ongoing mortgage insurance.
• Tougher to qualify for with recent bankruptcy.

Conventional Loan

• Requires higher down payment.
• No mortgage insurance.
• Low debt-to-income ratio required.

USDA Loan

• 100% financing available (no down payment).
• Limited to specific rural areas.
• Tight credit standards.

VA Loan

• No down payment option for veterans.
• Must have VA eligibility.
• Residual income requirements.

As you can see, each type of mortgage has its own criteria that may be hard to meet after bankruptcy. FHA provides the most flexibility in many cases, as long as you meet the waiting period and underwriting requirements.

Should I Refinance My Mortgage After Bankruptcy?

If you already have a mortgage that you kept current before and after your bankruptcy, you may wonder if you should refinance the loan. Some pros of refinancing after bankruptcy include:

• Lower Interest Rate – Could reduce your current rate and monthly payment.

• Shorter Loan Term – May be able to refi into a 15 or 20-year loan to pay it off faster.

• Cash-Out Refi – Tap home equity to consolidate other debts.

• Drop PMI – If you have 20% equity, could remove private mortgage insurance.

• Better Credit – Shows you can handle mortgage after bankruptcy.

But also consider the downsides before moving forward:

• Closing costs and fees for the refinance.

• Starting your loan term over with a new 30-year mortgage.

• Potential for higher interest rate than your current mortgage.

• timeline and waiting periods to qualify with your specific lender.

Carefully weigh the pros and cons before refinancing your home loan after bankruptcy. Your personal situation will determine if it makes sense or not.

What’s the Easiest FHA Loan to Get After Bankruptcy?

Since getting any mortgage after bankruptcy can be challenging, you may wonder what the “easiest” FHA loan options are. Some options that may be more attainable include:

• FHA 203(k) Rehab Loan – Finance home improvements with your purchase. More flexibility.

• Low-Balance FHA Loan – Loan limits below $125,000 can be easier to obtain.

• Streamline Refinance – Refinance your current FHA mortgage into a new one with limited documentation.

• Manufactured Home FHA Loan – Financing for factory-built/mobile homes.

The renovation and streamline refi options allow lenders to give some leeway on credit and income criteria. Smaller mortgage amounts can also be easier to qualify for.

What Credit Score is Needed?

The FHA doesn’t mandate a minimum credit score. But in reality, most lenders want at least a 580 FICO score for approval on an FHA purchase loan. Many lenders prefer scores of 620 or higher.

The better your credit score, the more likely you are to get approved, get a lower interest rate, and qualify for larger loan amounts. If your score is below 580, take time to improve it before applying.

Talk to lenders to see if they’ll approve you before submitting a full application. This avoids unnecessary credit checks if your score is too low for their requirements.

How Soon Can I Buy After Filing Chapter 7?

For a Chapter 7 bankruptcy discharge, the typical FHA waiting period is two years. But borrowers with extenuating circumstances can potentially qualify in as little as 12 months. Either way, you must have reestablished positive credit or not taken on new debts.

Don’t be surprised if some lenders want you to wait longer than the FHA minimums. Every lender has their own risk tolerances. Shop around to find ones willing to approve loans closer to the 12 or 24 month marks. Patience is key.

What About Buying After Chapter 13?

With a Chapter 13 bankruptcy, you can qualify for an FHA-insured loan after making 12 months of consecutive on-time payments in your bankruptcy repayment plan. You also need written permission from the Bankruptcy Court approving you to take on the new mortgage debt.

In addition to the 12-month waiting period, the lender will look closely at your current income and expenses to be sure you can afford the new home loan payment. Having stable income and few other debts strengthens your case for approval.

Does Bankruptcy Look Bad to Mortgage Lenders?

There’s no way around it – a recent bankruptcy filing will make lenders hesitant about approving a new mortgage. Not only because of the bankruptcy itself, but the circumstances that led up to it which show past financial mismanagement.

Lenders prefer borrowers with spotless credit histories and years of perfect mortgage payments. So yes, a bankruptcy in your recent past is going to raise eyebrows and require deeper review of your situation.

But with FHA’s bankruptcy guidelines, flexible underwriting, and housing counseling programs, you can still overcome the stigma if you meet the requirements. It just takes patience and perseverance.

Bankruptcy can feel like the end of home ownership dreams. But with an FHA-insured mortgage, and a diligent effort to repair your credit, you can buy again after bankruptcy.

Use FHA program guidance as your road map. Stick to their criteria, and find lenders willing to approve borrowers in your circumstances. With tenacity and responsible money management, you can land the keys to your next home.