How Does Bankruptcy Affect FHA Mortgages?

In this article:

• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy
• FHA Loan Within One Year of Bankruptcy

The financial crisis that began in 2008 has had lingering impacts on many people. A common question among prospective homebuyers is: After a bankruptcy, how long must you wait before you can get an FHA loan?

The answer depends on the kind of bankruptcy. Let’s take a look at the different kinds.

Chapter 7 Bankruptcy

A chapter 7 bankruptcy is when you discharge your debts -- meaning that you don't pay them back if you qualify for this kind of bankruptcy. This type of bankruptcy does not disqualify you from obtaining an FHA mortgage. You can get an FHA loan in as little two years after filling a chapter 13 bankruptcy. Here are the requirements:

• It must be at least two years since your chapter 7 bankruptcy case number was assigned.
• During this time, you must have re-established good credit or chosen not to take on new credit obligations.

Some borrowers may qualify for an FHA loan in as little as 12 months after chapter 7 bankruptcy. But only if you can show that the bankruptcy was caused by extenuating circumstances beyond your control and you can show documentation that you have since exhibited an ability to manage your financial affairs in a responsible manner.

It's important to remember that the FHA doesn't make loans; they only insure the FHA loans that lenders make. Whether or not  you will receive a mortgage depends on whether you are able to find a lender who is willing to give you a loan. It doesn't happen all the time, but some lenders might require you to wait longer than the two-year period.

Chapter 13 Bankruptcy

A chapter 13 bankruptcy is when you restructure your debt and get on a payment plan, and it does not disqualify you from obtaining an FHA mortgage. You can get an FHA loan in as little as one year after filling a chapter 13 bankruptcy. Here are the requirements:

• It must be 12 months since your chapter 13 bankrupcy case number was assigned.
• During this time, all of the required payments must have been made on time.
• You must have written permission from bankruptcy court permission to take on a new mortgage.

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FHA Loan Within One Year of Bankruptcy

You may be able to get a loan within 12 months of a bankruptcy, if you qualify according to FHA post-hardship guidelines.

The FHA has committed to helping borrowers with extenuating financial circumstances, and will allow lenders who choose to participate to make an FHA loan within one year of an 'Economic Event.' Some lenders have taken to calling this program the FHA's Back to Work program, a name derived from the subject of the guidelines they released for it.

FHA defines the Economic Event as:

'Any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of 20% or more for a period of at least six months.'

Regardless of your bankruptcy type, you'll be required to provide detailed information documenting this Economic Event to your lender.

You'll also need to complete one hour of housing counseling by a HUD-approved counselor. The counseling can be conducted in person, on the phone, or online, but it must be completed at least 30 days prior to submitting a loan application.

The FHA allows lenders to use its post-hardship guidelines, but lenders reserve the right to be more stringent than these guidelines allow. Therefore, the best way to see if you qualify for this program is to find an FHA lender to pre-qualify you.