Filing for bankruptcy is a big deal, that can be life-changing in many ways. However if you’ve filed bankruptcy know that about 1.5 million people file for bankruptcy each year in the United States, so you’re not alone.
Getting an FHA Loan after filing bankruptcy isn’t as difficult as you might think. There are a lot of myths that surround getting a mortgage after you’ve filed for bankruptcy.
Many people wrongly believe they need to wait 7 to 10 years before they can purchase a home after filing bankruptcy but the reality is you can purchase much sooner than that.
How long you have to wait in order to purchase a home is going to depend on what type of bankruptcy you filed. Chapter 7 and Chapter 13 Bankruptcies have different waiting periods and conditions.
FHA Loan Bankruptcy Waiting Period
FHA Loans After Chapter 7 Bankruptcy
If you’ve filed a Chapter 7 Bankruptcy, FHA says you can purchase a home after a two-year waiting period. Chapter 7 bankruptcy offers those filing it a fresh start, a clean slate when it comes to their debts. Chapter 7 Bankruptcies wipe out most of the debts you have obtained.
Typically the only type of debt that isn’t discharged in a Chapter 7 bankruptcy are government debts such as student loans. Government debts are a lot like marriage…til death do you part.
Government debts typically not discharged:
- Tax Liens
- Court-Ordered Child Support
- Alimony Payments
- Student Loans
Also, any debts obtained by committing fraud will not be discharged in bankruptcy either.
FHA Loans After Filing for Chapter 13 Bankruptcy
When you file a Chapter 7 bankruptcy it dissolves you of all or most of your debts and offers a clean slate. In chapter 13, you are reorganizing your debts. In chapter 13, your trustee and lawyer will typically order your debts in order of who is paid back first, second, and so on.
YOu then make reduced payments until those debts are paid off. Most people who file for a Chapter 13 bankruptcy do so because they earn too much money to qualify for a Chapter 7, or they have an asset they want to protect like a house.
Chapter 13 Bankruptcy has NO waiting period from discharge for FHA. This means you can purchase a home the day after your discharge from bankruptcy, or even during your repayment period as I will show you next.
Now, this doesn’t mean that you can do this with any lender. In fact, many online lenders, banks, and non-bank mortgage lenders will add what’s known as an overlay.
With those overlays, they will make you wait 1-2 years after discharge in order to qualify for an FHA loan after bankruptcy.
The only requirement from FHA is that if it’s been less than two years since your Chapter 13 bankruptcy was discharged, you’ll need to do a manually underwritten loan.
So if you’ve been told otherwise by a lender, just know that they likely have an overlay. At Bayou Mortgage we have access to hundreds of different lenders, many of which don’t have overlays like this one.
FHA Loan After Chapter 13 Bankruptcy Requirements:
- Bankruptcy Discharged More Than 2 Years or;
Manual Underwritten Loans:
- Qualify for a Manually Underwritten Loan
- Reestablished Credit
- No Late Payments After Bankruptcy Discharge
- 3.5% Down Payment with a 580 Credit Score
- 10% Down Payment with 500-579 Credit Score
- Debt-to-Income Ratio Under 43%
- Rent Verification- 12 Months of On-Time Payments
FHA Loan During Chapter 13
If you are currently in the repayment period of your Chapter 13 Bankruptcy, you can still qualify to purchase a home. You’ll just need to meet a few additional requirements.
Twelve Months of On-Time Payments: You’ll need to be at least 12 months into your repayment plan and have made all payments or at least the last 12 months of payments on time.
Trustee Approval: In addition to twelve months of on-time payments your trustee from the bankruptcy court will need to give written approval for you to purchase a home. This is fairly common, and usually, you’ll need to speak with your lawyer to get this process started.
Buying a home while still repaying your Chapter 13 Bankruptcy will also need to be manually underwritten so those requirements would apply as well.
In addition to the requirements we just went over, FHA also makes exceptions (although extremely rare) for certain extenuation circumstances. FHA says that if you meet the requirements of their extenuating circumstance, you can purchase a home one year from your discharge date instead of two.
Extenuating circumstances are those situations that are out of the borrower’s control. These are isolated events, sudden, and have a significant and prolonged effect on the person’s ability to earn an income.
Is that vague enough for you? This is one of the reasons why getting an exception is so difficult.
Events that aren’t extenuating circumstances:
- Career Change
In order to file for an exception, you’ll need to have all your documents in order. You’ll be asked to provide medical records, police reports, death certificates, accident reports, or any other item that could be relevant.
In other words, the underwriter will get even more in your business. Did I mention these are hard to qualify for? However, if your case is legitimate and you’re ok with the lender digging into your personal life you may consider applying for an exception.
Re-Establishing Your Credit After Bankruptcy
One of the most important requirements in getting an FHA loan after bankruptcy is to re-establish your credit. When you file for bankruptcy, your credit score is going to be hit hard. You’ll lose hundreds of points as your file, miss payments, etc.
However, these effects are not permanent as you’ve probably learned. Once you’ve been discharged you’ll start receiving new offers for credit almost immediately. Credit Cards, Auto Loans, Personal Loans, you name it they will start coming.
Now I probably don’t need to tell you but be wise, don’t take on more debt than you can handle. In fact, the reason lenders or so willing to offer you money (at high-interest rates) is because you can’t file bankruptcy for eight years after you filled the first time.
Quick Tips for Improving Your Credit After Bankruptcy
So, in order to re-establish your credit, you need to obtain new credit. This means putting in applications and getting approved.
Your FICO (credit) Score is calculated using five different metrics:
- Amounts Owed
- New Credit
- Payment History
- Credit Mix
- Length of Credit History
When you file bankruptcy, your payment history takes a huge hit. So the best way to boost your credit score is to borrow money and start paying it back.
We recommend opening a credit card and some type of loan. You may have to get a secure credit card or loan in order to be approved fresh out of bankruptcy but it’s worth it.
Important things to remember:
- Don’t take on too much new credit
- Keep your balance on your credit card low, under 10% of the credit limit
- Don’t charge more than you can pay in full
- Make all of your payments on time or early
If you do these things you’ll see your scores increase as you build back positive payment history. If you had to get secured cards or loans, after 6-12 months of on-time payments you’ll start receiving offers for unsecured credit.
Buying a house after bankruptcy is a marathon, not a sprint but if you keep focused, don’t overextend yourself, and make payments on time you’ll get there.
FHA LOAN FORECLOSURE WAITING PERIOD
If you’ve had a foreclosure either in with or without your bankruptcy, there are some additional requirements including a longer waiting period you must meet.
If you have a foreclosure or a deed-in-lieu of foreclosure or short-sale, you’ll need to wait 3 years from the recorded date of the foreclosure in order to get an FHA Loan. The waiting period begins on the date of the sheriff’s sale or when the deed of the property was transferred out of your name.
One important caveat is, Timeshare foreclosures aren’t real foreclosures; therefore they do not count.
FHA Loan Requirements
What are FHA Loans standard requirements?
- FHA requires borrowers to have a credit score of 580 in order to qualify for a 3.5% down payment. If you have a lower score; between 500-579, you’ll need 10% down in order to qualify.
- FHA requires your debt-to-income ratio to be under 56% but if you’ve had past credit issues you need to shoot between 43%-50% or less.
Seven Steps To Apply for FHA Loan After Bankruptcy
Applying for an FHA Loan after bankruptcy is fairly simple.
- Contact a lender with no overlays (we offer no overlays)
- Complete a mortgage application with your lender
- Provide any documents requested by your loan officer
- Receive your pre-approval letter
- Find a house
- Get your loan through underwriting; get approved
- Close on your new home
Remember, you can buy a home even if you’ve filed for bankruptcy. If you’ve been working with a lender who says you don’t meet their requirements due to overlays, we’d love to help you. Just click below to get started.