May 22, 2024

Getting FHA Mortgage Approval After Bankruptcy Is Easier Than You Think

Many potential homeowners mistakenly believe that they must wait a very long time to qualify for mortgage approval after declaring bankruptcy.  Depending on the circumstances, however, this is not the case.  Easy FHA mortgage guidelines allow some borrowers to become homeowners as soon as 12 months after a bankruptcy.

The primary factors determining how soon a borrower can qualify for FHA financing depend on the type of bankruptcy, the reasons that caused the bankruptcy and whether or not the borrower can demonstrate the ability to handle his or her finances in a responsible manner.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy involves liquidating or “walking away” from your debt.  Generally, court approval is necessary to file a Chapter 7 bankruptcy which involves an assessment of the debtor’s ability to repay his debts.  Often times, unanticipated events occur that result in debt accumulation that is impossible for an individual to repay based on current income.  Medical expenses, for example, are a primary cause of bankruptcy.

After the filing of a Chapter 7 bankruptcy, FHA guidelines usually result in disqualification for FHA mortgage financing for at least two years since the date of the bankruptcy discharge.  In addition to the two year waiting period the borrower must also demonstrate a “documented ability to responsibly manage his or her financial affairs” and re-establish a good credit record or avoid additional debt obligations.

When a bankruptcy was the result of extenuating circumstances beyond the borrower’s control, the waiting period for FHA financing is only 12 months.  In order to qualify for financing after only 12 months, however, the borrower must document the ability to responsibly manage his or her financial affairs.  In addition, the borrower must be able to document to the FHA’s satisfaction that the events that lead to the bankruptcy will not recur.  Some examples of what the FHA considers to be “one time” events could include a death in the family, a divorce or illness that caused extraordinary medical expenses.

Chapter 13 Bankruptcy

Under a Chapter 13 bankruptcy filing, a debtor typically agrees to make scheduled payments to creditors that will allow the borrower to repay his debts over time.

If a borrower can document that all required payments under the Chapter 13 filing were made on time for at least one year, the borrower may be eligible for FHA financing.  In addition, the borrower must also be able to document that a bankruptcy is not likely to recur and must also demonstrate financial responsibility by making all debt payments on time.  Since a Chapter 13 borrower is operating under a court supervised repayment plan, approval from the bankruptcy court is required for the borrower to enter into a mortgage transaction.

Given the difficult economic environment that many people are in, bankruptcy sometimes becomes an unavoidable option.  Careful planning prior to and after a bankruptcy, however, can dramatically reduce the waiting period before a borrower can qualify for FHA financing.