FHA loans and bankruptcy

by Peter G. Miller
January 12th, 2011

It’s likely no surprise, bankruptcies across the US are on the increase, a reality which raises an important question: Can you get an FHA loan after a bankruptcy?

“U.S. consumer bankruptcies increased 9 percent nationwide in 2010 from the previous year,” according to the American Bankruptcy Institute (ABI).

“The data showed that the overall consumer filing total for the 2010 calendar year (Jan. 1 – Dec. 31, 2010) reached 1,530,078 compared to the 1,407,788 total consumer filings recorded during 2009. Annual consumer filings have increased each year since the Bankruptcy Abuse Prevention and Consumer Prevention Act was enacted in 2005.”

“The steady climb of consumer filings notwithstanding the 2005 bankruptcy law restrictions demonstrate that families continue to turn to bankruptcy as a result of high debt burdens and stagnant income growth,” said ABI Executive Director Samuel J. Gerdano. “We expect that consumer filings will continue to rise in 2011.”

Chapter 7

As HUD explains, a bankruptcy does not disqualify a borrower for getting a mortgage under FHA guidelines. However, what it will do is defer the ability to get a new FHA loan for several years.

“A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy,” says HUD, “Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations. The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs.”

In fact, it may be possible to get a new FHA home loan within a year.

HUD also explains that if the bankruptcy was caused by “extenuating circumstances” beyond the borrower’s control — and if the borrowers “has since exhibited a documented ability to manage his or her financial affairs in a responsible manner” then it may be possible to qualify for an FHA mortgage in as little as 12 months.

Chapter 13

For Chapter 13 bankruptcies the FHA guidelines are different

“A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.”

The FHA rules are important for several reasons:

First, although the bankruptcy system was changed in 2005 to greatly favor lenders in general and credit card and student lenders in particular, the system continues to exist and allows many borrowers a second chance.

Second, the FHA is a more likely place to get a mortgage than many private-sector programs that require longer periods of good credit after a bankruptcy.

Third, as with credit scores, you can bet that many lenders are layering FHA bankruptcy requirements in an effort to assure compliance with the program. Whether such layering will continue is unclear since lenders gain no additional protections with higher standards.

The bottom line: If you have had a bankruptcy within the past year or two– especially one which was created by circumstances beyond your control such as a medical emergency, death of a spouse or a divorce — speak with lenders about FHA financing. It may be more available than many people think.

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