FHA Bankruptcy Waiting Period
At FHA Lenders, we are coming into contact with borrowers every day who have at one point 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 a 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 people also get bad advice when it comes to filing for bankruptcy. In most instances, it will limit their ability to get a mortgage. Then, they will have to go through a bankruptcy seasoning period or waiting period before they can apply for a mortgage again.
You can apply for an FHA loan just 2 years after a chapter 7 bankruptcy discharge, or after 12 months of on time payments in a chapter 13 bankruptcy payment plan and permission from the bankruptcy trustee. There may also be an opportunity to get an exception to the FHA bankruptcy waiting period.
Important – We have helped thousands of individuals to secure an FHA loan with a bankruptcy in their history.
Click to speak with us about getting approved 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 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 receive written permission from the bankruptcy court to enter into a new mortgage transaction
Minimum Credit Scores Needed for an FHA Approval with a Bankruptcy
The minimum credit score requirements for an FHA loan approval with a bankruptcy is not, and should not be any different than for those who are applying without a bankruptcy.
The FHA guidelines on credit scores are not different when there is a bankruptcy. The creidt score requirement for a 3.5% down payment is 580 and above. For those who have a credit score of 500-579, the down payment will be 10%. Once again, this is the same with or without a bankruptcy.
If you are being told that you need higher credit scores than what we referenced above, then the lender you are speaking with has imposed their own criteria (mortgage overlay) which is limiting your ability to get approved.
We are able to work with you on an approval with credit scores down to 500.
Manual FHA Underwriting with a Bankruptcy on Record
For most FHA loans, the AUS (automated underwriting system) may issue an approval prior to an underwriter seeing the file. In fact, our loan officers will see the results moments after submitting the loan.
When a loan file has an outlier like a bankruptcy, then the file must be manually underwritten by a human underwriter. This is when it is important to have an experienced loan officer who can help to prepare your submission for the best possible outcome. They will look for compensating factors that will top the scales in your favor.
Compensating Factors to Help Your Chances for an Approval
Compensating factors during the FHA underwriting process are things that can help sway the underwriter’s decision in your favor. Some of these factors include, but are not limited to the following:
- Income higher than what is needed for the proposed loan amount
- Low DTI (Debt to income ratio) which is also another way of saying high income
- Steady employment and job longevity
- Cash reserves showing you have enough saved to make payments for the forseeable future
- Positive previous rental or mortgage payment history
- Signs that you have established a positive credit history since the bankruptcy
Our loan officer will be looking for some compensating factors which may also require you to provide some additional documentation. Have patience and faith that it is part of the process in helping you to buy or refinance your dream home.
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. Read our article on the FHA Back to Work Program.
The waiting period could possibly be reduced to just 12 months under the following conditions:
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- 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:
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- 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:
- Foreclosures
- 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 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. Read our article on FHA loan requirements and you will see everything you need to know about applying for an FHA loan.
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.
Conclusion
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. Your hardship needs to be reasonable and convincing for the underwriters. Let us help you to prepare the argument on your hehalf.
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Related Questions
What is the FHA down payment requirement after a bankruptcy?
The FHA down payment requirement after a bankruptcy is also 3.5%. The down payment requirements do not differ based upon having a bankruptcy.
What are the FHA credit score requirements after a bankruptcy?
The credit score requirements do not change after filing for bankruptcy. Read our article on the FHA credit requirements to learn more.
What if my spouse filed for bankruptcy before we were married?
If your spouse filed for bankruptcy prior to getting married, then it is possible for you to get an FHA loan without your spouse being on the mortgage.
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