Every day at FHA Lenders, we interact with borrowers who have previously filed for bankruptcy. Despite the fact that FHA loans are simpler to qualify for, the FHA’s rules forbid borrowers from applying for one too soon after a bankruptcy has been discharged.
Millions of Americans file for bankruptcy every year. The reason for nearly half of those bankruptcies is medical debt. Additionally, according to bankruptcy statistics, the majority of people who declare bankruptcy are under 30 and have lower incomes.
Many individuals receive poor guidance when declaring bankruptcy. It will typically restrict their ability to obtain a mortgage. They will then have to go through a waiting or seasoning period after filing for bankruptcy before they can apply for a mortgage once more.
If you have made at least 12 timely bankruptcy payments and have obtained written consent from the bankruptcy court to engage in a new mortgage transaction, you can apply for an FHA loan just two years and twelve months after a chapter 7 or chapter 13 discharge, respectively.
Important: After a bankruptcy, not all lenders are ready to work with borrowers. Even with a bankruptcy, our network of FHA lenders can assist you in obtaining an FHA loan.
What is the FHA Bankruptcy Waiting Period?
According to the FHA guidelines, depending on the type of bankruptcy, the FHA bankruptcy waiting period is between one and two years after the bankruptcy discharge date. An exception, though, can be made to shorten the waiting period to just one year.
Whether you filed a chapter 7 or chapter 13 bankruptcy, in addition to a few other factors that are described below, will affect the waiting periods and requirements.
FHA Waiting Period After Chapter 7 Bankruptcy
In a chapter 7 bankruptcy, your debt is discharged, but your property and other assets might be sold to pay your creditors. This type of bankruptcy is typically used to discharge small debts like credit card, auto, and medical bills. This will not excuse taxes owed, alimony, or child support.
People who typically file for chapter 7 bankruptcy are those whose income levels make it nearly impossible for them to pay off their debts.
You can still get an FHA mortgage if you filed for chapter 7 bankruptcy as long as you apply (an FHA case number is generated) at least two years after the bankruptcy’s discharge date.
In addition to having two years pass, you must also:
Even though the two-year mark is just a few months away, it might not be a bad idea to start talking about your mortgage options if you filed for chapter 7 bankruptcy more than a year ago.
FHA Waiting Period After Chapter 13 Bankruptcy
In a chapter 13 bankruptcy, you consent to regular payments to cover your debts over time rather than having them discharged. The payment schedule to pay off the debts will be established by the bankruptcy court.
Chapter 13 bankruptcy is typically only appropriate for people whose income is stable and sufficient to pay off their debts over time.
According to the HUD Handbook 4000.1, if you filed for a chapter 13 bankruptcy, you can still get an FHA mortgage if you apply (FHA case number is generated) at least 12 months after the bankruptcy discharge date.
In addition to having 12 months pass, you must also:
Exceptions to the FHA Bankruptcy Waiting Period – FHA Back to Work Program
There are some exceptions to the bankruptcy waiting periods allowed by the FHA guidelines. The “FHA Back to Work Program,” which essentially shortens a chapter 7 waiting period to just one year, includes this exception procedure. Read our article on the FHA Back to Work Program.
The following circumstances could result in the waiting period being shortened to just 12 months:
- You can demonstrate that the bankruptcy happened due to extenuating circumstances or other factors outside of your control.
- Since then, you’ve demonstrated that you were capable of managing your money responsibly for those 12 months.
- You must attend mandatory HUD approved counseling
Some examples of extenuating circumstances are as follows:
- substantial income loss of 20% or more for at least six months
- the passing away of a spouse whose income was essential to making payments
- Serious illnesses
- Natural disasters
The lender must substantiate or provide documentation for these mitigating circumstances. Additionally, a manual underwriting process for FHA loans is required, during which the borrower’s credit history and performance since their bankruptcy discharge are carefully examined.
These other credit events are also helped by the FHA Back to Work Program for borrowers:
After one of these credit events, if you need assistance obtaining an FHA loan, one of our FHA lenders will be happy to discuss your unique situation with you.
Applying for an FHA Loan with a Bankruptcy
You would apply for an FHA loan in the same manner as you would without a bankruptcy if you have one in your past that is at least two years old. You can find out everything you need to know about applying for an FHA loan by reading our article on the requirements for FHA loans.
Your FHA loan application procedure would be the same if your bankruptcy was less than two years old, with the exception that you would need to provide some additional documentation to demonstrate that you had a good reason for filing for bankruptcy.
FHA Mortgage Rates After a Bankruptcy
The fact that you filed for bankruptcy will not automatically result in higher FHA mortgage interest rates. The rates are influenced by your credit scores. Bankruptcies have an indirect impact on your FHA interest rate because they lower your credit scores. After their bankruptcy has been discharged, a lot of people are able to raise their credit scores.
Conclusion
There is still a chance that you could eventually obtain an FHA loan even if you filed for bankruptcy. Two years is really not an eternity. The truth is that it might be best to wait the two years to organize your finances and raise your credit score. especially considering how much credit scores affect mortgage rates
You should be advised that getting an exception under the FHA Back to Work Program and having the waiting period shortened to just one year is not simple. Statistics show that most exceptions are not granted. Not that you shouldn’t try if you believe you meet the requirements, but the underwriters need to believe your hardship.
Related Questions
What is the FHA down payment requirement following a bankruptcy? It is additionally 3 percent. 5%. There are no different down payment requirements if you’ve filed for bankruptcy.
What are the FHA credit score requirements following bankruptcy? After declaring bankruptcy, the credit score requirements remain the same. To learn more, read our article on the FHA credit requirements.
What if my spouse declared bankruptcy before we got married? If your spouse declared bankruptcy before you got married, you may still be eligible for an FHA loan without your spouse’s signature on the loan.
Related Articles
Mistakes Home Buyers Make When Purchasing a Home – by Sharon Paxson
The Most Common Mortgage Myths – by Kyle Hiscock
FAQ
How long after bankruptcy can I get FHA?
After your bankruptcy has been discharged for two years, you are qualified for a new FHA loan.
How long do I have to wait to get a mortgage after Chapter 7?
FHA and VA mortgage regulations for Chapter 7 bankruptcy stipulate a two-year waiting period following the bankruptcy’s discharge. Not when you filed, but at that point, the court released you from your debts. A Chapter 7 discharge usually takes 6-8 months after filing.
What is FHA guidelines for bankruptcies?
If you have made at least 12 timely bankruptcy payments and have obtained written consent from the bankruptcy court to engage in a new mortgage transaction, you can apply for an FHA loan just two years and twelve months after a chapter 7 or chapter 13 discharge, respectively.