FHA Loans After Chapter 7 Bankruptcy

Getting a home loan following the discharge of a bankruptcy is not impossible, but it pays to know a few key facts before you commit. Did you know there’s a mandatory waiting period all borrowers must sit through before applying for a new FHA loan after a Chapter 7 bankruptcy? We cover some important issues about FHA mortgages after a Chapter 7 below.

What is the standard waiting period for an FHA loan after a Chapter 7 bankruptcy?

The standard waiting period for obtaining an FHA-insured mortgage after a Chapter 7 bankruptcy is two years. It is critical to note that this two-year clock starts from the official date of your bankruptcy discharge, not the date you initially filed your case with the court.

Are there exceptions to the two-year waiting period for a Chapter 7 discharge?

The FHA may allow for a shorter waiting period under specific conditions. It is possible to qualify for an FHA loan in as little as one year from the discharge date. This may apply to you if you can prove that the bankruptcy was caused by "extenuating circumstances" which are viewed as isolated, one-time events that are highly unlikely to happen again.

What qualifies as "extenuating circumstances" for a shorter waiting period?

To be considered for the shorter one-year waiting period, you must provide compelling evidence of a significant event that led to the bankruptcy. Examples of extenuating circumstances that the FHA may consider include the death or serious illness of the primary wage earner in the household.

Another valid reason? A job layoff or a business failure that was outside of your control. Furthermore, a substantial and unexpected increase in medical expenses not covered by insurance could also qualify. To use this exception, provide thorough documentation to support your claim and demonstrate that you have since established a solid history of sound financial management.

What does the FHA look for in my credit history after a Chapter 7 bankruptcy?

Simply waiting out the required period is not enough to secure a loan. You must actively work on rebuilding your credit profile to show lenders you are now a reliable borrower. FHA lenders will want to see that you have re-established good credit, which means having new credit accounts.

Consider getting a secured credit card or a small installment loan to build a consistent history of on-time payments. A complete lack of new credit activity can be as detrimental as having negative credit marks. You must also not have acquired any new major derogatory credit since the bankruptcy; this means avoiding new collections, charge-offs, or other significant negative marks on your credit report.

What documentation will I need for an FHA loan after a Chapter 7 bankruptcy?

Make an on-paper plan for financial recovery, from the time your official bankruptcy discharge papers from the court, which show the date your debts were discharged.

You may also need to write a detailed letter of explanation about the caus of your bankruptcy. Describe the concrete steps you have taken to rebuild your finances, and makes a case for why you are now a responsible borrower.

If you are applying under the "extenuating circumstances" exception, documentation must support this letter. 

Furthermore, you must provide proof of re-established credit through statements from your new credit accounts showing a history of on-time payments. This is all in addition to the standard FHA loan documentation, such as pay stubs, tax returns, bank statements, and asset information.