Tips for Applying for an FHA Loan After Bankruptcy

September 12, 2024

Filing for bankruptcy, whether Chapter 7 or Chapter 13, has credit consequences. It may be financially necessary, but bankruptcy is a disruption to financial business as usual for those who must file. And that includes your ability to obtain a mortgage loan.

However, bankruptcy doesn't permanently disqualify you from homeownership. Before discussing the waiting periods for mortgage loans, we must examine the distinctions between Chapter 7 and Chapter 13 bankruptcies:

• Chapter 7 Bankruptcy
  The liquidation of your non-exempt assets to repay creditors. While it offers a relatively quick resolution, it can hurt your credit score for up to 10 years.  
• Chapter 13 Bankruptcy
  This version allows those with regular income to enter into an approved repayment plan to repay their debts over multiple years. This type of bankruptcy is said to be less damaging to your credit score compared to Chapter 7 options.  

Once you file bankruptcy, you are expected to live up to the terms of the agreement so that your bankruptcy can be properly discharged when the time is right. Once your bankruptcy has been discharged, a waiting period begins until you can file for a new home loan.
Conventional Loans

The government does not back conventional loans. These mortgages may have stricter eligibility criteria compared to government-backed loans.

• Chapter 7 Bankruptcy
  Some sources say it’s necessary to wait at least four years after your bankruptcy discharge before applying for a conventional loan.  
• Chapter 13 Bankruptcy
  You'll typically need to wait two years after your bankruptcy discharge or four years from the filing date, whichever is later, before applying for a conventional loan.

FHA Loans

FHA loans are insured by the Federal Housing Administration and are designed to help borrowers with lower credit scores and down payments achieve homeownership. 

• Chapter 7 Bankruptcy
  The waiting period for an FHA loan after a Chapter 7 bankruptcy is two years from the discharge date.  
• Chapter 13 Bankruptcy
  You may qualify for an FHA loan while still in an active Chapter 13 bankruptcy, but this depends on obtaining the court's permission. Some borrowers may be permitted to apply one year from the discharge date.

Factors Affecting Loan Approval Following a Bankruptcy

• Credit Scores
  The higher your post-bankruptcy FICO scores, the better your chances of securing a loan with favorable terms.
• Income and Employment
  Lenders want to ensure you have a stable income and employment history to make your mortgage payments on time.  
• Debt-to-Income Ratio (DTI)
  Your DTI ratio compares your monthly debt payments to your gross monthly income
• Bankruptcy Circumstances
  Lenders may review the circumstances surrounding your bankruptcy, such as the reasons for filing and your efforts to rebuild your financial situation.

Qualifying for an FHA purchase loan after bankruptcy is achievable with careful planning and effort. Maintaining good FICO scores, paying all bills on time, and keeping your debt ratio low can increase your chances of achieving homeownership even after bankruptcy.

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