May 10, 2011
A common question for some FHA loan applicants has to do with previous bankruptcy filings and how having a bankruptcy on a credit record can affect a new application for an FHA home loan. There are two types of bankruptcy-Chapter 7 is a liquidation type bankruptcy, Chapter 13 is a reorganization process where outstanding debts are paid off over a period of up to five years.
Chapter 7, where the borrower’s assets are liquidated in order to help pay off the debts owed, does not automatically mean an FHA loan applicant will be denied a mortgage loan. According to the FHA official site, “A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations.”
FHA rules state that a borrower who has filed Chapter 7 bankruptcy must show a “documented ability to responsibly manage his or her financial affairs.” A history of on-time payments, an improved credit score and two years of steady income can be part of such documentation.
FHA rules offer some measure of flexibility when it comes to the minimum waiting period after a Chapter 7 bankruptcy filing.
According to the FHA official site, “An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.”
It is important to point out that this rule is the FHA standard, but a particular lender may require a longer wait time than the minimum allowed by FHA rules. FHA loans are not mandatory for any lender, and terms at one bank may be stricter than the FHA’s.
That’s one reason why competitive shopping for an FHA home loan is important–you may find more favorable terms at one lender that aren’t offered by another.
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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