You might think that a previous bankruptcy or foreclosure would preclude you from buying a home, but fortunately, that’s not the case. Though you will need to abide by certain waiting periods, you can still qualify for any type of mortgage loan, as long as you meet the required credit and income qualifications.
The FHA’s waiting periods are among the shortest. Their standards for approval also tend to be less stringent, often making them an even better choice for buyers with a foreclosure or bankruptcy tainting their record.
Debt can pile up quickly, and people sometimes find themselves in deeper than they could ever have imagined. This is when a person might file for bankruptcy, allowing them to erase their debts or more easily repay them and wipe the financial slate clean, so to speak.
Though there are several types of bankruptcy, the two most common are Chapter 7 and Chapter 13. With both of these, the consumer can still qualify for an FHA loan afterward.
In most cases, the waiting period on FHA loans after bankruptcy is 2 years, though there can be exceptions.
Questions about whether you qualify?
Find an FHA lender who can work with you every step of the way. →Chapter 7 bankruptcy can be filed by both businesses and individuals and is known as “liquidation” bankruptcy. It’s often used to discharge large amounts of unsecured debts like credit cards, medical bills, etc. In Chapter 7 bankruptcy, a person’s assets and property are sold off, with the proceeds going toward any creditors. Certain debts, like alimony, child support and even certain student loans, are completely forgiven under this type of bankruptcy.
When it comes to closing on a mortgage with the FHA, Chapter 7 bankruptcy requires a two-year waiting period. There are certain exceptional circumstances in which you could qualify sooner, though. Some of these include:
In general, if a borrower was forced to declare bankruptcy because of a one-time event that led to income loss, they can be approved for an FHA loan as quickly as one year after filing. An example of this would be if someone had a sudden medical emergency that required extensive (and expensive hospitalization. If it caused job loss, cost them thousands of dollars and made them unable to pay both the medical bills and other debts, they may have had to declare bankruptcy out of necessity. Therefore, the bankruptcy doesn’t necessarily reflect their overall creditworthiness as a borrower.
Keep in mind that lenders have their own credit underwriting guidelines. Some may not consider extenuating circumstances or otherwise be willing to move forward until borrowers are beyond that two-year mark post-discharge.
Chapter 13 bankruptcy is different in that the person doesn’t have their debts fully wiped clean or their property liquidated. Instead, they agree to a payment plan and can maintain ownership of their assets and property while repaying their debts. Chapter 13 usually involves consolidating debts into one larger balance.
If applying for a loan with the FHA, Chapter 13 filers may only need to wait one year. Guidelines and policies can vary by lender.
See below for the full breakdown of waiting periods by bankruptcy and loan type.
| LOAN TYPE | WAITING PERIOD (Ch. 7) | WAITING PERIOD (Ch. 13) |
|---|---|---|
| FHA | 2 years | 1 year, with bankruptcy court approval |
| VA | 2 years | 1 year, with bankruptcy court approval |
| Conventional | 4 years | 2 years |
| USDA | 3 years (1 year in exceptional circumstances) | 1 year, with bankruptcy court approval |
If you get behind on mortgage payments on a property, the lender can take possession of the home, ultimately selling it to make up for their losses. This is called a foreclosure, and though it certainly isn’t a gleaming recommendation for your next mortgage lender, you can still qualify for an FHA loan down the line.
As with a bankruptcy, you will need to wait a certain amount of time before applying. If you foreclosed on a mortgage backed by the FHA, VA or USDA, your waiting period will be determined by CAIVRS -- the Credit Alert Verification Reporting System.
In most cases, you’ll have a three year waiting period until you can apply for another FHA loan. That’s considerably shorter than the seven years you’ll typically need to wait to secure a conventional loan.
If you also declared bankruptcy, the timing of the foreclosure will play a role in eligibility, too. Guidelines for dealing with a post-bankruptcy foreclosure can vary by lender and other factors.
After either a bankruptcy or foreclosure, your main goal should be to build up your credit. If taking out a loan is anywhere on your radar, you’ll want to show your future lender that you’re a reliable, trustworthy borrower who makes payments on time, every time.
Though you can’t boost your credit score instantly, there are some ways you can gradually improve your number -- as well as your appeal to a future lender -- over time.
Some steps to consider include:
Also, don’t close credit accounts once you pay them off. That helps lengthen your credit history, which is another positive factor for credit scores.
If you’re worried about the temptation to use that card again, cut it up and throw it in the trash. It will still exist on your credit history -- just not in your pocketbook.
