June 30, 2022

Can I Get An FHA Mortgage After A Bankruptcy?

A common question for borrowers who have had to file for bankruptcy is if they are still eligible for FHA financing.  The short answer is yes but a particular applicant may or may not qualify for FHA financing depending on the individual circumstances and age and type of the bankruptcy.

The FHA has different guidelines depending on whether the applicant filed a Chapter 7 or Chapter 13 bankruptcy.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy filing does not automatically disqualify a potential FHA applicant

The FHA requires that a lender document and ascertain that the circumstances that lead to the bankruptcy were caused by a one time unusual event and will not recur again.  For example, some of the common circumstances that would usually be evaluated as a one time event caused by circumstances outside the control of the borrower are divorce, job loss or the death of a family member.

Under a Chapter 13 bankruptcy, the borrower agrees to a court ordered schedule of payments to creditors. In order to be considered for FHA financing after a Chapter 13 bankruptcy, the lender must document that all required payments under the borrowers bankruptcy payment plan have been timely made for at least one year.  In addition, the bankruptcy court is required to give permission to the borrower to apply for mortgage financing.

Chapter 7 Bankruptcy

Under a Chapter 7 bankruptcy, the debtor seeks to have his debts completely discharged and liquidated. If the bankruptcy court approves a Chapter 7 filing, the debtor can legally walk away from his debts without further obligation to pay.

A borrower seeking FHA financing after a Chapter 7 bankruptcy is not automatically disqualified but must usually wait at least two years from the date of the bankruptcy discharge prior to being eligible for an FHA loan.  The waiting time for FHA financing after a Chapter 7 bankruptcy can be less than two years, but never less than one year, if it can be documented that the bankruptcy was caused by extenuating circumstances that were beyond the control of the borrower.

After a Chapter 7 bankruptcy, it is imperative that a borrower re-establish credit and have an on time payment record.  A borrower choosing not to incur new credit obligations can also be considered for FHA financing.  It is usually better for an applicant to establish new credit obligations with lenders who report to the credit bureaus since this will rebuild the applicant’s credit score.

An applicant without an active credit bureau history is usually required to establish alternative credit based on timely payments made to creditors that do not report to the credit bureaus.  Examples of alternative credit are timely payments for car insurance, phone bills, utility bills or rent payments.

The FHA requires documentation of timely payments after a bankruptcy in order to establish that the borrower is financially responsible and willing and able to make timely payments to creditors.