The Federal Housing Administration (FHA) is not a home loan lender, but instead is a source for loan guarantees. This means that the FHA approves a guarantee that tells mortgage lenders that the loan will be paid even if the borrower defaults on the payments. This results in mortgage loan applications receiving approval that might not otherwise be approved. Applying for a FHA mortgage after bankruptcy can result in an approval, but not all applications are approved.
FHA Mortgage Approval
There are two steps to getting approved for an FHA mortgage:
- Obtain the home loan guarantee through FHA.
- Obtain approval for the home loan application through a mortgage lender.
In other words, just because an applicant obtains an FHA guarantee it does not mean that lenders are required to approve the loan application. Borrowers must meet the underwriting guidelines for the lender, although these guidelines are usually relaxed considerably for FHA loans versus conventional loans.
Impact of Bankruptcy
Getting a mortgage loan approved after bankruptcy using an FHA guarantee will differ depending on what type of bankruptcy the applicant experienced.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy, which generally liquidates debt and grants people a "clean credit slate," does not automatically disqualify an applicant from getting turned down for an FHA mortgage loan as long as the bankruptcy occurred over two years ago. Additionally, the borrower must have a credit report that demonstrates two years of paying debt on time. Applicants who have chosen to not obtain credit in that two year period of time must be able to prove timely payments to alternate sources, such as with documentation of timely rent payments or other bills.
In certain circumstances, FHA loans can be approved for applicants who have less than two years since the Chapter 7 bankruptcy, but the applicant must be able to show proof that the bankruptcy occurred as a result of extenuating circumstances and should also be able to show documentation to prove responsible management of finances since the bankruptcy.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy rearranges the debt and results in lower monthly payments. This debt restructuring is designed to help people get their debt back under control under the eye of a bankruptcy court. Like the Chapter 7 bankruptcy, this type of bankruptcy does not automatically result in an FHA mortgage application getting turned down. In fact, as long as the Chapter 13 bankruptcy has been in place for over a year, and throughout that year the person has demonstrated the ability to make timely payments, an applicant may be approved for a home loan.
It is important to note that anyone in a Chapter 13 bankruptcy debt restructuring program looking to apply for a home loan must first obtain permission from the bankruptcy court. If the applicant does not first obtain permission, the application will probably be denied and there may be additional repercussions to deal with from the bankruptcy court.
Preparing to Apply
A bankruptcy does not automatically disqualify you from obtaining an FHA mortgage, but you can increase your chances of getting approved by responsibly managing the credit you obtain after the bankruptcy.