FHA Loan After Bankruptcy: How Long Do You Have to Wait?

Do you want to obtain a FHA loan after bankruptcy? This guide by the Law Offices of Wenarsky and Goldstein, LLC will walk you through the process.

Federal Housing Administration (FHA) Loans After Bankruptcy

A bankruptcy can tremendously lower a debtor’s credit score. In fact, the better their score was before the bankruptcy filing, the more it will drop when the bankruptcy is entered. Unfortunately, one’s credit score is considered among the most important factors lenders look at when someone applies for a mortgage loan.

Securing a mortgage after experiencing bankruptcy may seem challenging, but it’s not impossible. This guide will walk you through the steps and requirements for obtaining an FHA home loan after bankruptcy.

FHA or Federal Housing Administration loans help borrowers with lower credit scores who meet qualifying requirements finance a home. They are a type of mortgage that requires a lower minimum credit score than conventional mortgage loans.

Whether you’re recovering from Chapter 7 bankruptcy, Chapter 13 bankruptcy, or another type of bankruptcy filing, the Law Offices of Wenarsky and Goldstein, LLC are here to help you achieve your goal of getting an FHA loan. Call us for more information.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), which falls under the U.S. Department of Housing and Urban Development (HUD).

You may have other options if you do not qualify for a conventional loan. Lenders offer different types of mortgages, including VA, USDA, and FHA loans.

An FHA-insured mortgage loan is popular among first-time homebuyers due to their lower credit score and down payment requirements than conventional loans. These loans are administered and underwritten by third-party FHA lenders, offering fixed interest rates and the flexibility of 15-year or 30-year terms.

You may still qualify for an FHA loan even if you’ve had a bankruptcy discharged within the last one or two years. While bankruptcy can stay on your credit report for an extended period, the FHA bankruptcy guidelines let you qualify for a loan sooner. How soon depends on whether you did a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

USDA, FHA, or VA Loans?

When deciding between USDA, FHA, or VA loans, it’s important to consider your eligibility, financial situation, and specific needs, as each type of loan offers different benefits and requirements. 

After bankruptcy, you may be eligible for an FHA, VA, USDA loan, or even a conventional mortgage if you meet the necessary requirements. In addition, you will need to meet the waiting period rule as well as show you have worked to repair your credit score. 

Unlike FHA loans, USDA loans require no down payment. However, to qualify for a USDA loan, you have to be a low- to moderate-income resident of a rural area designated by the U.S. Department of Agriculture. Furthermore, although there is no formal minimum credit score, a borrower has to have a credit history that demonstrates they will be able to pay back the debt.

A VA loan is available for eligible active-duty service members, veterans, and qualified surviving spouses. Although there is a required minimum credit score, no down payment is needed. 

What Are the Eligibility Requirements for an FHA Loan After Bankruptcy?

To get an FHA home loan after bankruptcy, there are specific rules to follow, and they depend on the kind of bankruptcy you file. There are three common types of bankruptcy, each with its eligibility requirements for obtaining an FHA loan.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or liquidation bankruptcy, means selling everything you own to pay off debts and eliminate some debt. A person can qualify for a new FHA loan two years after bankruptcy is discharged. A discharge date is usually marked by a court order releasing one from the debts included in the bankruptcy.

In addition to the waiting period, you must re-establish good credit and provide a letter explaining the reason for the bankruptcy. In some cases, if you can prove “extenuating circumstances” like the death of a wage-earning spouse or a natural disaster, you may be eligible for FHA financing after 12 months. Still, you’ll need lots of paperwork to prove it.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy sets up a court-ordered repayment plan for individuals with a consistent income. To secure an FHA home loan, you need to prove one year of on-time payments on the Chapter 13 plan and get court permission to apply for the first mortgage loan.

Subchapter 5 Bankruptcy

Subchapter 5 bankruptcy, also called Small Business Reorganization Act (SBRA) bankruptcy, is a type of bankruptcy meant to help small businesses reorganize their debts and keep running.

Even though it mainly deals with business bankruptcies, it can affect people who want FHA home loans after bankruptcy. This can happen if you’re connected to a small business or have financial ties to one. That’s because many mortgage lenders look at your money situation, including any business bankruptcies, to decide if you can get an FHA loan.

It’s important to understand these rules when considering an FHA loan after filing for bankruptcy. Our team at the Law Offices of Wenarsky and Goldstein, LLC can guide you through it.

What Are the Steps to Apply for an FHA Loan After Bankruptcy?

Applying for an FHA loan after filing for bankruptcy can be straightforward. Here are the seven steps to guide you through the FHA loan application:

  1. Contact a lender with no overlays: Start by contacting a lender that doesn’t have strict overlays on FHA loan requirements. Overlays are internal guidelines that lenders follow over and above published lending guidelines. Lenders without overlays typically have fewer restrictions on borrowers, making it easier for them to qualify. Also, they may offer lower interest rates and fees, as well as faster loan closings.
  2. Complete a mortgage application: Make a mortgage application with your chosen lender. This step provides crucial information about your finances.
  3. Provide requested documents: You will need to provide specific documents such as bank statements and tax records. To ensure a smooth process, make sure you provide these promptly.
  4. Receive a pre-approval letter: FHA preapprovals indicate your likelihood of qualifying for mortgage financing from an FHA-approved lender. You will receive a letter from your lender stating the amount you are eligible for.
  5. Find a house: With your preapproval, search for your new home within your budget.
  6. Checking and approving your loan: A lender will examine your financial history as part of a process called underwriting, during which the lender will determine if you are a good candidate for a loan. If everything is okay, your loan will be approved.
  7. Closing on your new home: Once your loan is approved, you can close on your new home. This involves signing the necessary documents and finalizing the sale.

Remember, even if you’ve filed for bankruptcy, you can still get an FHA loan to achieve your goal of homeownership. If you’ve faced challenges with lenders imposing strict overlays, don’t hesitate to reach out. Our team is here to assist you in applying for an FHA loan after a bankruptcy discharge.

How Do I Re-Establish My Credit After Bankruptcy?

Obtaining an FHA loan requires re-establishing your credit after bankruptcy. Your credit score is significantly affected by bankruptcy, but the damage is not permanent. You might receive new credit offers within a few months of discharge, including credit cards, auto loans, and personal loans.

However, do not borrow too much money because lenders might charge you very high interest rates for your loans. Because of the eight-year waiting period before you can file another bankruptcy, be cautious and do not borrow too much money.

Here are some suggested steps to help you rebuild your credit:

  1. Seek new credit: To rebuild credit, apply for new credit, and secure approvals.
  2. Understand key metrics: Get to know your FICO score. It looks at how much you owe, new credit, payment history, credit mix, and credit history length.
  3. Practice responsible borrowing: Borrow money and consistently pay it back to boost your credit score.

Remember these important guidelines:

  • Avoid taking on too much new credit.
  • Keep credit card balances below 10% of the credit limit.
  • Charge only what you can pay in full.
  • Ensure timely payments or early payments to foster a positive payment history.

By following these steps, your credit scores may rise over time. After 6-12 months of on-time payments, offers for unsecured credit will come your way. Rebuilding your credit is the first step; reaching out to our professionals is the next step as we guide you through obtaining an FHA loan.

Contact the Law Offices of Wenarsky and Goldstein, LLC, Today To Get Help With Your FHA Loan

Ready to take the next step toward securing your FHA loan after filing for bankruptcy? Our dedicated team is here to provide you with personal, efficient, and practical help every step of the way. We have helped many individuals navigate the complex world of FHA home loans and bankruptcy.

Don’t let past financial challenges hold you back from your dream of homeownership. Contact us today for a consultation, and let’s help you realize your homeownership goals.

Call the Law Office of Wenarsky & Goldstein

At the Law Offices of Wenarsky & Goldstein, LLC, our New York and New Jersey attorneys are experienced and knowledgeable in bankruptcy, estate planning and probate, guardianship, special needs planning, and real estate law. To learn more about how we can assist you with your legal needs, call us today at 973-453-2838.