February 5, 2021
People can and do apply for home loans, including FHA mortgages, following a bankruptcy filing. What does it take to be approved for an FHA home loan after filing bankruptcy?
The key to loan approval in these cases? Time. You can’t simply apply for bankruptcy and six months later try to get a new home loan.
FHA loan rules require a minimum time known as a “seasoning period” to be waited out. This seasoning period must pass before you are permitted to apply for a new FHA home loan.
How does the seasoning period work? This part is confusing for some.
We’ll review the specifics of FHA loan rules for each type of bankruptcy (Chapter 7 and Chapter 13) individually as there are unique rules for each. One consistent feature of these rules? Your ability to apply for a new home loan depends on how long you have waited before trying for the new loan.
Borrowers who have filed bankruptcy should expect to wait 12 months at the very least, but you may be required to wait out multiple years depending on circumstances.
You are also required to show a record of good credit management in the time between the bankruptcy and your new loan application.
Applying For A New FHA Mortgage After A Chapter 7 Bankruptcy
HUD 4000.1, the FHA Single Family Lender’s Handbook, states that Chapter 7 bankruptcy (the “liquidation” bankruptcy) does not disqualify an applicant “if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge”.
It helps to re-read the above and take note that the date of the bankruptcy, not the initial filing, is what starts the seasoning period “clock”.
Many borrowers get confused here and part of the reason why may be thanks to another set of rules which state that a seasoning period of at least 12 months but less than two years is possible under certain circumstances:
- The FHA loan applicant can show their bankruptcy “was caused by extenuating circumstances beyond the Borrower’s control”;
- The borrower “has since exhibited a documented ability to manage their financial affairs in a responsible manner”.
During the time the borrower has to wait in between the bankruptcy and the end of the seasoning period, the borrower must either have established a pattern of good credit use OR has “chosen not to incur new credit obligations”
Applying For An FHA Mortgage After A Chapter 13 Bankruptcy
HUD 4000.1 says Chapter 13 bankruptcy is not an automatic barrier to a new home loan if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed.
In these cases, FHA loan rules instruct the lender to determine that the borrower’s payment record under the bankruptcy has “been satisfactory and all required payments have been made on time.”
The borrower is also required in these cases to get written permission from the bankruptcy court to move forward with the loan; you must provide this written permission to the lender.
And what about cases where a Chapter 13 discharge is not reflected in the applicant’s credit report, “or additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy,”?
Here, your participating FHA lender is required to get copies of the bankruptcy and discharge documentation as part of the loan application package.
The lender must also make a determination that the bankruptcy was caused by circumstances beyond the borrower’s control and is not likely to happen again. Knowing these requirements–especially what the FHA requires your loan officer to do in order to approve the loan–can help you plan and save for the next mortgage application.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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