There are mandatory FHA Waiting Period After Bankruptcy and Foreclosure to qualify for FHA loans. HUD Guidelines also have FHA waiting period after a short sale to qualify for an FHA loan.
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. In the following paragraphs, we will cover FHA waiting period after bankruptcy and foreclosure guidelines.
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.
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 need to meet a 580 credit score to qualify. In this article, we will discuss and cover FHA waiting period after bankruptcy and foreclosure guidelines.
FHA Waiting Period After Chapter 7 Bankruptcy Discharge
A Chapter 7 Bankruptcy is also 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
- federal 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.
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 a portion 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 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 need to provide they have been timely with all their payments to their creditors 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 with less than two years of the discharge date will not get an 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 any late payments after a foreclosure, deed-in-lieu of foreclosure, or short sale. If borrowers with any late payments after a bankruptcy and housing event are told they do not qualify for an FHA loan, please contact us at 800-900-8569 or email us at gcho@gustancho.com. Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays to answer your phone calls and any questions.
Mortgage Rates With a Prior Bankruptcy and Foreclosure
Many borrowers think they will be paying 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.
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. There are no pricing adjustments for a prior bankruptcy or foreclosure on the mortgage rates.
This BLOG on the FHA waiting period after bankruptcy and foreclosure was written by Michelle McCue and updated on December 13th, 2022
December 13, 2022 - 5 min read