It used to be that if you had a bankruptcy in your past, getting a mortgage, including an FHA loan was rather difficult, if not impossible. Today, however, the story is completely different. Even if you have a Chapter 7 bankruptcy in your past, you might be eligible for FHA financing. Every lender will have different requirements regarding what qualifies an applicant with this type of credit history, but the FHA has general rules that every lender must follow.
Elapsed Time Since Chapter 7 Bankruptcy
The one hard and fast rule that pertains to a Chapter 7 Bankruptcy and an FHA loan is that 2 years must have elapsed from the day of discharge. This date is different from the date that you filed for bankruptcy. Consider it the date that everything was said and done and all of your debts were wiped away. It is from that date that you start counting your 24 months before you would become eligible for FHA financing.
What Occurred During that Time?
What occurred between the time of discharge and the date of application for an FHA loan is the next thing that the lender will be most concerned with on your application. They will take a close look at your credit report to see what you have done with your financial life since then. What they are looking for is a complete 360-degree change in your financial habits. They want to see that you built your credit back up and that you have made timely payments on everything. If you have any late payments during that time or you have overextended yourself again, meaning that you have used up most or all of your available credit lines, then you will not be able to demonstrate a positive rebuilding of your credit.
If you did not recreate any credit, you might still be eligible for an FHA loan. You have to be able to demonstrate that you chose not to reestablish your credit and in turn saved money in a liquid account. You need to show the lender that you chose to be financially responsible by not having any new debts after the Chapter 7 bankruptcy and instead, chose to save your money. The lender might ask other questions regarding your lack of credit, including whether you were turned down for the credit and that is the reason that you do not have a reestablished credit history.
Exceptions to the Rule
Like almost every other rule pertaining to the FHA loan, there are exceptions to the rule when it comes to the time period you must wait to apply for a new loan. If you had extenuating circumstances surrounding your reasons for filing for bankruptcy, such as:
- You were downsized or let go due to no wrongdoing on your part
- You were injured or became ill and were unable to work
If either of these situations applied to you, the lender might be able to use the extenuating circumstances clause. This means that you only have to wait 12 months after the discharge of your bankruptcy. The difference here is that you will have to prove that your income decreased by at least 20 percent as a result of the unforeseen circumstances that occurred that caused the financial difficulties. You will also have to prove that you have since gotten back into the regular routine and are making a decent income once again. The lender wants to see that you were able to pick up the pieces and move on. Just as the lender wants to see reestablished credit with someone that did not experience extenuating circumstances, the same is true in this situation. If you rebuilt your credit, you will have an easier time getting qualified after just 12 months.
This is one circumstance, however, that is greatly up to the lender’s discretion. The FHA set the above guidelines, but each lender has to determine what they are comfortable with taking on as far as risk goes. If they have a large amount of borrowers that are recently out of bankruptcy, they might tighten up their portfolio and not take on any other risky loans. If they do not have a large amount of these types of loans or they do not consider them risky, they may be willing to provide you with an FHA loan after a Chapter 7 Bankruptcy. Do not give up if one lender tells you no – there are many FHA lenders out there that can help you get into the home you desire.