March 3, 2014
A reader asks, “In 2007 I applied for bankruptcy and got dismissed in 2008. The creditors didn’t accept my plan. In 2008 house got sold. I need to know the waiting period before applying for an FHA loan.”
There are two types of bankruptcy mentioned by name in the FHA loan rules found in HUD 4155.1. One is Chapter 7, the other is Chapter 13. Since the reader didn’t mention which type of bankruptcy, we’ll quote both guidelines. For Chapter 7, HUD 4155.1 Chapter Four states:
“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.
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.”
When it comes to Chapter 13 bankruptcy, the rules state the following:
“A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that:
–one year of the pay-out period under the bankruptcy has elapsed
–the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
–the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.”
Note the requirements for establishing good credit in the wake of the bankruptcy and the importance of on-time payments. These are very critical for FHA loan approval in the time after the bankruptcy proceedings. It’s also good to know that FHA loan rules put the waiting periods starting at the time bankruptcy is discharged, not when it is initially filed.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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