FHA Waiting Period After Bankruptcy and Foreclosure

FHA Waiting Period After Bankruptcy and Foreclosure

Gustan Cho Associates are mortgage brokers licensed in 48 states

There are mandatory FHA Waiting Period After Bankruptcy and Foreclosure to qualify for FHA loans. HUD Guidelines also have an FHA waiting period after a short sale to qualify for an FHA loan. FHA loans are also designed to assist individuals with low- to moderate-income levels who may need help qualifying for home loans for first-time homebuyers with little to no credit or bad credit or due to factors such as credit history or limited funds. Dale Elenteny, a senior loan officer at Gustan Cho Associates, explains about the benefits of FHA loans:

FHA loans has the most lenient agency mortgage guidelines over any other loan program in the country. You can qualify for an FHA loan with credit scores down to 500 FICO, high debt-to-income ratio, outstanding collections and charge-off accounts, and late payments in the past 12 months with a larger down payment.

An FHA loan offers the flexibility to purchase or refinance various properties, including single-family homes, condominiums, townhomes, and manufactured homes. HUD, the parent of the Federal Housing Administration or FHA, is the federal agency that sets standards and writes and enforces FHA Guidelines on qualification requirements. The newest updated FHA Guidelines are in its most recent HUD 4000.1 FHA Handbook. The following paragraphs will discuss the FHA waiting period after bankruptcy and foreclosure.

What Is an FHA Loan?

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An FHA loan is a mortgage supported by the FHA, which means that if you default on your loan, the FHA will pay the lender a portion of the loan amount. Mitigating the risk for the lender enables them to provide more advantageous terms and conditions to the
borrower.

If you have experienced a major credit event, such as bankruptcy, foreclosure, short sale, or deed-in-lieu, your chances of buying a home are slim. However, one type of mortgage can help you overcome this challenge: an FHA loan. This blog post will explain how an FHA loan can help you buy a home after a credit event.

Moreover, it can be used to acquire a property needing repairs, with the option to finance the renovations through a 203(k) loan. Additionally, an FHA loan allows for purchasing a home with energy-efficient features, leveraging an Energy Efficient Mortgage (EEM). The following paragraphs will cover the FHA waiting period after bankruptcy and foreclosure guidelines.

How Does an FHA Loan Work?

To get an FHA loan, you must apply through an FHA-approved lender, such as a bank, credit union, or online lender. To assess your eligibility and determine the loan amount, the lender will evaluate various factors, including your income, credit score, debt-to-
income ratio, and other relevant considerations.

There are certain costs associated with an FHA loan. These include an upfront mortgage insurance premium (UFMIP), which amounts to 1.75% of the loan amount, as well as an annual or yearly mortgage insurance premium (MIP) or 0.55% of the loan amount on a 30-year fixed-rate FHA loan.

Conventional loans have no upfront mortgage insurance like FHA loans have. Plus, you cannot cancel FHA MIP during the 30-year fixed-rate term. The FHA mortgage insurance premium rate varies, depending on the loan term and loan-to-value ratio. Moreover, a down payment is required, 3.5% of the purchase price for credit scores 580 or higher. On the other hand, if your credit score ranges from 500 to 579, HUD, the parent of FHA, requires a 10% down payment or higher. You can use your savings, gifts from family or friends, grants, or loans from nonprofit organizations or government agencies as sources of your down payment.

2023 HUD Guidelines on FHA Loans

The 4000.1 FHA handbook sets all of the FHA Guidelines. FHA waiting period after bankruptcy and foreclosure guidelines require a mandatory 2-year waiting period after Chapter 7 Bankruptcy. Borrowers can qualify for FHA loans one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval.

Bankruptcy is a procedure under the law that allows individuals to either eliminate or restructure their debts with the protection of a court. There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Under Chapter 7, nonexempt assets are liquidated, and most debts are discharged. Chapter 13 involves debt restructuring and the establishment of a three to five-year repayment plan.

Its important to note that bankruptcy can stay recorded on your credit report for up to 10 years and significantly impact your credit score. However, if you have undergone a Chapter 7 bankruptcy, you can be eligible for an FHA loan after two years. For a Chapter 13 bankruptcy, you may apply after one year of completing the repayment plan, provided you have reestablished good credit and have no other negative items on your credit report.

FHA Loans After Foreclosure and Housing Event

Borrowers can qualify for an FHA loan after foreclosure. A foreclosure is a legal process that allows the lender to take possession of your home and sell it to recover the unpaid loan balance. A foreclosure can happen when you default on your mortgage payments for more than 90 days and fail to cure the default.

A foreclosure can stay recorded on your credit report for up to seven years and lower your credit score significantly. You can be eligible for an FHA loan three years after foreclosure if you have reestablished good credit and have no other derogatory items on your credit report.

There is a three-year waiting period after foreclosure, deed-in-lieu of foreclosure, and short sale to qualify for FHA loans. To qualify for a 3.5% down payment FHA loan, homebuyers must meet a 580 credit score. This article will discuss and cover the FHA waiting period after bankruptcy and foreclosure guidelines.

FHA Loans After a Deed-In-Lieu of Foreclosure

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Borrowers can qualify for an FHA loan after a deed-in-lieu. A deed-in-lieu is a process that allows you to voluntarily transfer the ownership of your home to the lender in exchange for being released from your mortgage obligation. A deed-in-lieu can happen when you face financial hardship and cannot afford to keep making your mortgage payments or when your home is underwater.

A deed-in-lieu can stay on your credit report for up to seven years and lower your credit score significantly. The three waiting period start date after a deed-in-lieu of foreclosure starts from the date the deed was transferred out of the homeowners name to the name of the lender or the new owner of the property. Or the date of the sheriff’s sale.

You can apply for an FHA loan three years after a deed-in-lieu if you have reestablished good credit and have no other derogatory items on your credit report.

FHA Loans After a Short Sale

Homebuyers can qualify for an FHA loan after a short sale.  A short sale is a process that allows you to sell your home for less than what you owe on your mortgage with the lender’s approval. A short sale can happen when you face financial hardship and cannot afford to keep making your mortgage payments or when your home is underwater, meaning its market value is less than its outstanding loan balance. A short sale can stay recorded on your credit report for up to seven years and lower your credit score significantly. However, you can be eligible for an FHA loan three years after a short sale if you have reestablished good credit and have no other derogatory items on your credit report.

FHA Waiting Period After Chapter 7 Bankruptcy Discharge

A Chapter 7 Bankruptcy is a total liquidation where consumers are overwhelmed with debts. Petitioners normally have no means to catch up and make debt payments. They can use this federal tool to ask the courts to discharge their debts so that they can get a new fresh start on their financial life.

Consumers file Chapter 7 Bankruptcy mainly because they lose their jobs and businesses. They no longer have an income source or a large reduction of their household income where they can no longer pay their debts. Another reason for consumers that file Chapter 7 Bankruptcy is divorce. Medical reasons and debts where they have no way of catching up on their monthly debt payments with the income they are making or due to unemployment.

Debts That Can Be Discharged In Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy will discharge most debts, including:

  • collection accounts
  • charge off accounts
  • outstanding utility bills and cellular bills
  • civil judgments
  • tax liens
  • wage garnishments
  • personal debts
  • repossessions
  • any other personal and business debts

The only debts not dischargeable are government debts such as taxes, court fines, child and alimony payments, fines from government agencies, and federal student loans.

Debts That Cannot Be Discharged In Chapter 7 Bankruptcy

Debts that cannot be discharged through a Chapter 7 Bankruptcy are the following debts:

  • government debts
  • federally backed student loans
  • tax liens
  • fines owing to the government
  • child support payments
  • alimony payments
  • federal taxes
  • state taxes
  • county and local taxes
  • fines imposed by any local, county, state, and federal government agencies

FHA Loan After Chapter 7 Bankruptcy

Homebuyers can qualify for an FHA loan within two years after a Chapter 7 Bankruptcy discharge. No late payments or derogatory credit after their Chapter 7 Bankruptcy. A minimum 580 credit score is required to qualify for a 3.5% down payment FHA home purchase loan after a Chapter 7 Bankruptcy. Homebuyers with credit scores under 580 credit scores can qualify for an FHA loan after a Chapter 7 Bankruptcy as long as they have a 10% down payment and compensating factors.

You can be eligible for an FHA loan with a debt-to-income or DTI ratio of up to 46.9%,front-end and 56.9% back-end. Conventional loans do not have a front-end DTI but has a maximum of a 50% DTI. This means you can have more debt relative to your income and still get approved for an FHA loan

Mortgage lenders like to see borrowers with a prior Chapter 7 Bankruptcy have re-established credit after Chapter 7 Bankruptcy and frown upon late payments after a Chapter 7 Bankruptcy. Late payments after bankruptcy and housing event are not deal killers as long as borrowers can get approve/eligible per Automated Underwriting System Findings.

FHA Waiting Period After Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy is also called a debt restructuring plan. Consumers get appointed a Chapter 13 Bankruptcy Trustee. The Trustee will review the petitioner’s income from the Chapter 13 Bankruptcy and allocate some of their income to creditors. The trustee will allocate that portion to the list of the petitioner’s creditors for a period, normally between three to five years. After the repayment plan, the remaining debts owed to the consumer’s creditors are discharged or wiped off.
FHA Waiting Period After Chapter 13 Bankruptcy

FHA Loan Requirements on Chapter 13 Bankruptcy 

The consumer is debt-free after the Chapter 13 Bankruptcy discharge, where they can restart their financial life. To qualify for a Chapter 13 Bankruptcy, the petitioner must be employed with documented income. Unemployed people will not qualify for a Chapter 13 Bankruptcy. A consumer who filed a Chapter 13 Bankruptcy can qualify for an FHA loan one year into the Chapter 13 Bankruptcy. Borrowers must ensure they have been timely with all their credit payments for the past 12 months—approval of the Chapter 13 Bankruptcy Trustee.

Qualifying For FHA Loan During Chapter 13 Repayment Period

A consumer who just had a Chapter 13 Bankruptcy discharge can qualify for an FHA loan right after the Chapter 13 Bankruptcy discharge date with no waiting period. However, if the Chapter 13 Bankruptcy discharge has been less than two years, then the FHA loan must be manual underwriting. Any Chapter 13 Bankruptcy FHA Loan applications under two years of discharge will not be approve/eligible per DU FINDINGS.

FHA Waiting Period After Foreclosure, Deed-In-Lieu of Foreclosure, Short Sale

There is a three-year waiting period after the recorded date or the date of the sheriff’s foreclosure sale and deed-in-lieu of foreclosure to qualify for FHA home loans. There is a three-year waiting period to qualify for an FHA loan from the short sale date. There is a three-year waiting period from the date of a mortgage charge-off and second mortgage charge-off to qualify for an FHA loan. Lenders do not want to see late payments after a foreclosure, deed-in-lieu of foreclosure, or short sale.

Mortgage Rates With a Prior Bankruptcy and Foreclosure

Many borrowers think they will pay a higher mortgage rate due to a prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale. This is not true. Prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, and a short sale have nothing to do with mortgage rates in FHA and conventional loan programs. Alex Carlucci, a senior loan officer and team leader at Gustan Cho Associates, explains what type of impact a prior bankruptcy and foreclosure have on mortgage rates:

A bankruptcy or foreclosure has no impact on the pricing of mortgage rates on FHA loans. There is no loan-level pricing adjustments a prior bankruptcy or foreclosure will have on your rates.

The main factor that dictates mortgage rates on FHA loans is credit scores. With Conventional loans, credit scores and loan-to-value are the indicators of mortgage rates. A prior bankruptcy or foreclosure has no bearing on what interest rates the borrower gets. No pricing adjustments for a prior bankruptcy or foreclosure on the mortgage rates exist.

What Are the Benefits of an FHA Loan?

As an illustration, after a Chapter 7 bankruptcy discharge, you can qualify for an FHA loan in as little as two years, and after a foreclosure, you may be eligible in three years. More flexible underwriting guidelines: The FHA has more lenient underwriting standards than conventional lenders and may consider compensating factors such as your employment history, savings, reserves, or payment history when evaluating your loan application.

What Are the Drawbacks of an FHA Loan?

An FHA loan also has some disadvantages you should know before applying. Some of these drawbacks are Higher mortgage insurance costs: You will have to pay both an upfront and an annual mortgage insurance premium for an FHA loan, which can add to your monthly payments and closing costs.

You will have to pay the annual MIP for the life of the loan or at least 11 years, depending on your down payment and loan term, whereas you can cancel the private mortgage insurance (PMI) for a conventional loan once you gained 20% equity in your home.

FHA loans have lower loan limits than conventional loans. The amount you can borrow with an FHA loan is subject to limitations set by the FHA, which vary depending on the county and type of property. As a result, in certain areas, you may find it difficult to purchase a more expensive home using an FHA loan.

HUD Property Standards For FHA Loans

Property condition requirements on FHA loans are the property needs to be safe, habitable, and secure. HUD has strict standards for the condition and quality of the property you want to buy with an FHA loan. The property must meet the minimum property requirements (MPRs) and pass an appraisal by an FHA-approved appraiser. The MPRs cover various aspects of the property, such as safety, security, soundness, and sanitation. If the property does not meet the MPRs, you may have to ask the seller to make repairs or use a 203(k) loan to finance the repairs.

Conventional Versus FHA Waiting Period After Bankruptcy and Foreclosure

An FHA loan allows you to qualify for a mortgage sooner and with less stringent requirements than a conventional loan. Here are some examples of how an FHA loan can help you buy a home after different credit events. An FHA loan has several advantages for borrowers with a credit event or other challenges in qualifying for a conventional loan. Some of these benefits are lower credit score requirements:  With an FHA loan, you can be eligible even with a credit score as low as 500, which contrasts conventional loans that typically necessitate a minimum score of 620 or higher.

HUD, the parent of FHA, has shorter waiting periods after a credit event versus conventional loans. You can qualify for an FHA loan sooner after a bankruptcy, foreclosure, short sale, or deed-in-lieu than a conventional loan. In comparison, you might need to wait four or seven years in similar circumstances for a conventional loan.

FHA loans have lower down payment requirements: With an FHA loan, you can purchase a home with a minimum down payment of just 3.5%. Conversely, conventional loans generally necessitate a minimum down payment of 5%; in certain cases, they can go as high as 20%—higher debt-to-income ratio limits.

FHA Waiting Period After Bankruptcy and Foreclosure With Late Payments

If borrowers with any late payments after a bankruptcy and housing event are told they do not qualify for an FHA loan, please get in touch with us at 800-900-8569 or email us at alex@gustancho.com. Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays to answer your phone calls and any questions.

An FHA loan can be a way for homebuyers who have had a credit event or have other challenges to qualify for a conventional loan. An FHA loan can offer lower credit score requirements, shorter waiting periods after a credit event, lower down payment requirements, higher debt-to-income ratio limits, and more flexible underwriting guidelines than a conventional loan.

However, an FHA loan also has some drawbacks, such as higher mortgage insurance costs, lower loan limits, property condition requirements, and more paperwork than a conventional loan. Therefore, you should compare different types of loans and lenders before applying for an FHA loan. You should also consult with a mortgage professional and a financial advisor to ensure you can afford the mortgage payments and the long-term costs.


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