At CambridgeHomeLoan.com, we come into contact with borrowers more than you think, who have at one point or another filed for bankruptcy. Although FHA loans are easier to qualify for, the FHA guidelines do not allow borrowers to apply for an FHA loan too soon after their bankruptcy has been discharged.
Millions of Americans file for bankruptcy every year. Nearly half of those bankruptcies are due to medical related debts. The bankruptcy statistics also indicate that most of the individuals who file for bankruptcy are under the age of 30 and are on the lower income scale. Many that file for bankruptcy are also entrepreneurial and may have had an issue with their business for a year or two and needed help.
The fact is that many people get bad advice when it comes to filing for bankruptcy. In most instances this bad advice limits their ability to get a mortgage. The guidelines provide a bankruptcy seasoning period or waiting period before a potential home buyer can apply for a mortgage again.
Important – Not all lenders have to or are willing to work with borrowers after a bankruptcy. CambridgeHomeLoan.com can help you to get an FHA loan even with a bankruptcy.
WHAT IS THE FHA BANKRUPTCY WAITING PERIOD?
The FHA guidelines indicate that the FHA bankruptcy waiting period is 1 to 2 years after the bankruptcy discharge date depending upon the type of bankruptcy. However, an exception can be granted to reduce that waiting period to just 1 year.
The waiting periods and requirements will depend upon whether you filed a chapter 7 or chapter 13 bankruptcy in addition to some other factors which are detailed below.
FHA WAITING PERIOD AFTER CHAPTER 7 BANKRUPTCY
A chapter 7 bankruptcy is when your debt is forgiven but you also may have your property and other assets liquidated to repay the creditors. This type of bankruptcy is usually done to eliminate credit card, auto, medical bills and other small debts. This will not excuse taxes owed, alimony, or child support.
A chapter 7 bankruptcy is typically for individuals whose income levels make it nearly impossible to pay off their debts.
If you filed for a chapter 7 bankruptcy, you can still get an FHA mortgage if you apply (FHA case number is generated) at least two years after the bankruptcy discharge date.
In addition to having two years pass, you must also:
- Establish a good credit standing since the bankruptcy. This means making on time payments.
- Do not incur any new debt
If you filed for a chapter 7 bankruptcy more than a year ago, then it may not be a bad idea to begin discussing your mortgage options even if the two-year mark is just a few months away.
FHA WAITING PERIOD AFTER CHAPTER 13 BANKRUPTCY
A chapter 13 bankruptcy is one where you agree to make payments to pay for your debts over time and not forgive them. The bankruptcy court will establish the payment plan to satisfy the debts.
A chapter 13 bankruptcy is usually for those who have a steady income and sufficient to pay off the outstanding debts over time.
According to the Housing and Urban Development “HUD Handbook 4000.1,” if you filed for a chapter 13 bankruptcy, you can still get an FHA mortgage if you apply (FHA case number is generated) at least 12 months after the bankruptcy discharge date.
In addition to having 12 months pass, you must also:
- You must have been making on time payments since your bankruptcy has been discharged
- You must receive written permission from the bankruptcy court to enter into a new mortgage transaction
EXCEPTIONS TO THE FHA BANKRUPTCY WAITING PERIOD – FHA BACK TO WORK PROGRAM
The FHA guidelines do permit some exceptions to the bankruptcy waiting periods. This exception process falls under the “FHA Back to Work Program” which essentially reduces a chapter 7 waiting period to just one year.
The waiting period could possibly be reduced to just 12 months under the following conditions:
- You can show that the bankruptcy occurred due to reasons beyond your control, or extenuating circumstances
- You have since proven to have been able to be financially responsible during those 12 months
- You must attend mandatory HUD approved counseling
Some examples of extenuating circumstances are as follows:
- Significant loss of income of 20% or more for at least 6 months
- Death of a spouse whose income was a critical factor in making payments
- Serious illnesses
- Natural disasters
These extenuating circumstances must be proven or documented by the lender. The FHA loan application must also be manually underwritten with careful analysis of the borrower’s credit history and performance since the bankruptcy was discharged.
The FHA Back to Work Program also helps borrowers with these other credit events:
- Loan Modifications
- Short Sales
- Deed in lieu
- Pre-foreclosure sales
If you need help finding an FHA loan after one of these credit events, then one of our CambridgeHomeLoan loan officers will gladly speak with you about your personal scenario.
APPLYING FOR AN FHA LOAN WITH A BANKRUPTCY
If you have a bankruptcy in your history and it is at least two years old, then you would apply for an FHA loan the same way that you would without a bankruptcy.
If you have a bankruptcy that is less than two years old, then your FHA loan application process would be the same with the exception of having to provide some additional documentation to prove you have a valid excuse for your bankruptcy.
FHA MORTGAGE RATES AFTER A BANKRUPTCY
The FHA mortgage interest rates will not be higher simply because you have a bankruptcy. The rates are influenced by your credit scores. Since bankruptcies negatively impact your credit scores, then they also indirectly have an effect on your FHA interest rate. Many people are able to improve their credit scores soon after their bankruptcy has been discharged.
If you filed for bankruptcy, there is still hope for you to get an FHA loan at some point. Two years is really not an eternity. The reality is it may be best to wait the two years to get your finances in order and to improve your credit score. Especially since credit scores have a huge impact on mortgage rates.
If you are hoping to get an exception under the FHA Back to Work Program and have the waiting period reduced to just one year, then you should be warned that getting the exception is not easy. Statistics show that most exceptions are not granted. This is not to say that you should not try if you feel that you meet the criteria, but your hardship needs to be convincing for the underwriters.
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