FHA Loans After Chapter 7 Bankruptcy: A Reader Question

“A Chapter 7 bankruptcy (liquidation) 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.”

Additionally, Chapter Four Section C says, “An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

• can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
• has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note: The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”However, borrowers should know that the lender’s standards may exceed FHA standards for waiting periods–this is acceptable to the FHA and permitted under FHA loan program rules. A lender may require a longer “seasoning period” following a Chapter 7 bankruptcy, so in the case of this reader question, it’s entirely possible that a five year wait might be needed for that particular lender in that particular circumstance.

Borrowers are always free to explore other options with other financial institutions–if you find a lender willing to work with you in your circumstances, you may find the FHA minimums are the only ones to worry about. Again, that’s given that you have a lender willing to observe those minimums only.

Do you have questions about FHA loans? Ask us in the comments section.