August 16, 2018
Getting an FHA home loan following a Chapter 7 bankruptcy is not impossible; borrowers who handle their finances and credit responsibly after filing bankruptcy will find FHA home loan rules are more favorable to them than it may seem.
Some assume that bankruptcy means never being able to own a home again or that it may take seven to ten years to recover from such a circumstance. FHA loan rules say otherwise, and while additional lender standards may apply the borrower does not necessarily have to wait such a long time to be considered for a new home loan.
FHA Loan Requirements For Applying For A Mortgage After Chapter 7 Bankruptcy
FHA loan rules in HUD 4000.1 state clearly that a Chapter 7 bankruptcy is not a barrier to a new home loan:
“A Chapter 7 bankruptcy (liquidation) does not disqualify a Borrower from obtaining an FHA-insured Mortgage if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge. During this time, the Borrower must have:
- re-established good credit; or
- chosen not to incur new credit obligations.
Lender requirements for “good credit” will apply and the FHA does not specifically discuss what is considered good credit in these cases; that’s where having a conversation with a loan officer will be very helpful.
Borrowers are required to wait out a minimum seasoning period following the discharge (NOT the initial filing) of a Chapter 7 bankruptcy. According to HUD 4000.1, an acceptable waiting period of one year minimum and less than two years may be permitted. Lender standards and state law may apply above and beyond this.
The two-years-or-less waiting period is not the only requirement; borrowers will be required to demonstrate to the lender that “the bankruptcy was caused by extenuating circumstances beyond the Borrower’s control; and has since exhibited a documented ability to manage their financial affairs in a responsible manner” according to HUD 4000.1
FHA Loans After Chapter 7 Bankruptcy: Lender Requirements
No two participating FHA lenders are exactly the same, so lender requirements for loan approval following bankruptcy will vary. You don’t necessarily have to dive into a credit repair program following bankruptcy; if you pay your existing financial obligations on time in the seasoning period but choose not to apply for new lines of credit, you may (depending on the lender) find this to be a strategy worth considering.
Discuss this with a loan officer before you commit to choosing not to establish new credit-your lender may or may not require certain evidence that you are an acceptable credit risk now, and you will need to know what that is in order to properly get ready for the new loan.
Remember that FHA loan rules apply but so do the lender’s rules and state law. Complicating factors including a co-borrowing spouse in community property states and other factors may require additional standards to be met.
Additionally, if you have a bankruptcy trustee you may be required to coordinate with the trustee or seek permission to enter into new credit arrangements depending on the timing of your applications.
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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