FHA Guidelines for Bankruptcies

FHA Guidelines for Bankruptcies Have you filed for bankruptcy and want to buy a house with an FHA loan? FHA has specific waiting periods and credit score requirements for approving borrowers after bankruptcy.

This comprehensive guide will explain mandatory FHA waiting times following Chapter 7, Chapter 13, and foreclosure. We'll also provide tips to improve your chances of successfully qualifying for an FHA mortgage loan after bankruptcy or foreclosure.

Overview of FHA Rules on Loans After Bankruptcy

The Federal Housing Administration (FHA) requires the following waiting periods before you can obtain a new FHA mortgage after bankruptcy or foreclosure:

  • 2 years after a Chapter 7 bankruptcy discharge
  • 1 year after a Chapter 13 bankruptcy discharge
  • 3 years after a foreclosure

You must also have re-established good credit and stable income since the bankruptcy or foreclosure event.

These mandatory waiting times allow you to rebuild your finances and credit. Exception waivers to FHA's bankruptcy and foreclosure waiting periods are limited.

Having a bankruptcy or foreclosure makes getting a mortgage more challenging. But FHA provides a viable option if you follow credit rebuilding best practices during the waiting timeframe.

How a Chapter 7 Bankruptcy Impacts FHA Loan Eligibility

With a Chapter 7 bankruptcy, you liquidate assets to pay off as much debt as possible, and the remaining debts are discharged.

FHA requires you to wait two years after a Chapter 7 discharge before applying for an FHA-insured mortgage. You also must re-establish at least 2 years of credit since the filing, with solid payment histories and a minimum of 3 current tradelines.

Any mortgage debt and foreclosures associated with the Chapter 7 filing also require FHA waiting periods before getting a new FHA loan.

How a Chapter 13 Bankruptcy Impacts FHA Mortgage Eligibility

With a Chapter 13 bankruptcy, you enter into a court-managed 3-5-year repayment plan to pay back creditors over time.

FHA's waiting period is just 1 year after a Chapter 13 discharge before you can apply for a new FHA mortgage.

You still must demonstrate that you've re-established positive credit. And all FHA foreclosure waiting periods still apply even after a Chapter 13 discharge.

The shorter 1-year wait aims to reward Chapter 13 filers for sticking to their repayment plan. But other credit requirements remain.

What Credit Score Do You Need for an FHA Loan After Bankruptcy?

To qualify for an FHA mortgage after bankruptcy, the typical credit score requirements are:

  • A minimum credit score of 580 is required.
  • Credit scores of 620+ are preferred for better rates.
  • At least one borrower must have a credit score exceeding 580.
  • Non-traditional credit is not permitted.

So the higher your score, the greater your chances of approval. Credit scores in the inferior range (under 620) will face scrutiny. Expect to provide significant documentation explaining derogatory credit events.

Manual Underwriting for FHA Loans After Bankruptcy

If your credit score is under 620 after bankruptcy, your application will go through manual underwriting. This involves providing:

  • A written explanation of the events and factors that led to the bankruptcy or foreclosure
  • Letters of explanation for any late mortgage payments.
  • Documentation verifying your income, assets, debts, and expenses
  • Evidence you've re-established positive credit since the bankruptcy or foreclosure.

Manual underwriting allows an underwriter to assess your overall credit picture rather than just relying on your credit scores alone. People with scores as low as 580 may still get approved through manual underwriting if they make a good case to the underwriter.

Requirements for Using an FHA Loan While in Chapter 13 Bankruptcy

If you're currently in an open Chapter 13 bankruptcy, you can still potentially qualify for an FHA loan if you:

  • I have made one year of consistent Chapter 13 bankruptcy plan payments. Payments cannot be in arrears.
  • Have written permission from the bankruptcy court to enter into the mortgage transaction.
  • Include the mortgage payment in the approved Chapter 13 repayment plan.
  • Get mortgage approval from an FHA lender.

This policy aims to facilitate homeownership if you show you can handle both Chapter 13 and mortgage payments responsibly.

Tips for Rebuilding Your Credit After Bankruptcy

Here are steps to rebuild credit and overcome derogatory marks after bankruptcy:

  • Obtain secured credit cards to establish a positive payment history.
  • Keep credit card balances low and repay them on time each month.
  • Avoid applying for too much new credit at once, right after bankruptcy.
  • Build up your savings to show reserves to cover emergencies.
  • Obtain a co-signer with strong credit if needed.
  • Explain any credit issues in a written statement to underwriters.

Taking positive actions uplifts your credit reports over time.

Alternatives to Qualify for a Mortgage After Bankruptcy

If you don't want to wait for FHA's 2-year requirement, some alternatives to quickly qualifying for a mortgage after bankruptcy include:

  • Hard-money loans have higher interest rates and costs but are easier to qualify.
  • Portfolio loans held by banks or credit unions have more flexibility but limited availability.
  • Co-signer with good credit: A co-signer supplements your application.
  • Piggyback loan: a combination of a first and second mortgage.

While costly, these provide options between bankruptcy and qualifying for an FHA loan. Shop multiple lenders and loan programs for the best fit.

Key Takeaways on FHA Loans After Bankruptcy

Here are the critical criteria to understand about getting an FHA loan after bankruptcy:

  • FHA requires a two-year wait after a Chapter 7 discharge and one year after a Chapter 13 discharge.
  • You must have re-established good credit and income during the waiting period.
  • Minimum credit scores 580 are required, but scores above 620 are preferred.
  • Manual underwriting may help those with weaker credit scores still qualify.
  • Other mortgage options may offer quicker approval if you can't wait for the FHA's timeline.

While paying off bankruptcy debts, focus on rebuilding your credit as much as possible. This gives you the best shot at an FHA loan approval once the required waiting period elapses.


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