FHA Loan Bankruptcy Guidelines: What Do I Need To Consider?


The economy isn’t exactly kind to everyone and many people are unable to pursue major life goals without the help of loans. Loans, although scary and frightening, have become best friends to many people who struggle shelling out thousands of cash upfront. Contrary to the negative connotation around this funding scheme, loans are supposed to help people in their road to financial stability as opposed to financial destruction.

This is exactly why financial arrangements that surround loans last for several years, decades even: for people to have ample time to expend only money they can afford to let go of at the moment. Different people have different paying powers and the consistency of cash flow isn’t the same with everyone.

On the plus side, FHA loans exist to help those who struggle reaching commercial loan standards. Because of this availability, many people can now build home equity sooner than usual.

But for business owners and individuals who’ve filed for bankruptcy, how different does the ballgame become for them? A common question potential borrowers who’ve gone through tremendous economic hurdles is, how soon can I apply for an FHA mortgage loan after bankruptcy, if I’m still even allowed to in the first place?

Truth is, anyone who’s experienced a bankruptcy or a foreclosure is still eligible for an FHA loan grant. Of course, conditions apply.

A very prominent consideration to factor in is the type of bankruptcy filed for. Was it a Chapter 7 or a chapter 13?

For those who do not know yet, a chapter 7 bankruptcy is when a debtor may have his or her funds discharged in exchange for nonexempt property. In other words, a debtor is no longer obliged to pay his creditors as long as property equivalent to his debt is available in return. This specific bankruptcy type does not disqualify a potential borrower from receiving FHA mortgage. He or she can obtain this loan as early as two years after the chapter 7 case has been filed for, and as long as a bankruptcy case number has been released. Moving forward, another requirement is for the debtor to have already re-established their credit standing or at least have avoided picking up new credit undertakings altogether.

That said, it is possible for a few debtors to be extended an FHA loan within only a year as long as they are able to prove that the bankruptcy was due to extenuating conditions, and not management or business miscalculations. Of course, this is under the confidence that the said debtor is able to prove the they are now back on track or at least are in better control of their finances.

To clarify, the Federal Housing Administration is not responsible for disbursing money, nor do they sign checks. Their sole duty is to insure loans provided by FHA-approved commercial lending companies. Because of friendlier standards, many people with low credit scores can apply for loans and qualify. Because of this reality, lenders are more prone to being flaked at by already struggling debtors. Hence, the mortgage insurance a borrower pays helps mitigate the danger these lenders are exposed to.

It is best to remember, too, that not all lending institutions are the same in that their level of generosity may vary. So best find a lender who is willing to work with you and potentially grant you a loan. At the end of the day, the FHA only insures mortgages and has no control over the approval of the lenders you approach. If one is fortunate, a pass can be given to you. But many lenders will encourage you to observe the two year period.

Chapter 13

Oppositely, in a chapter 13 case, a debtor will not have to sell any nonexempt property to make up for funds. As a result, they will have to restructure their payment schemes and make sure every creditor is paid religiously what they are due.  A chapter 13 bankruptcy also does not stop a debtor from being given a loan. An individual may be granted an FHA loan exactly one year after they’ve filed for their unfortunate economic outcome. As long as a potential borrower has not missed a payment in the last 12 months since bankruptcy, a chapter 13 case number has been assigned exactly 1 full year from the financial downfall, and a written approval from the court are present, an applicant may be accommodated.

For both chapter 7 and 13, note that the FHA loan bankruptcy waiting period begins when the bankruptcy is dismissed and not when it was initially applied for. As established earlier in the article, select FHA rules do present a few exceptions on the waiting stage. Still, a borrower is typically obliged to wait for one entire year before being allowed to apply for a loan.

To reiterate, the FHA only insures mortgage and is not obligated to influence a lender’s approval of your loan. One of your primary challenges may be to look for an FHA-approve lender willing to look at your case.