FHA loan eligibility depends on your ability to rebuild credit and finances after bankruptcy.
You might file for bankruptcy and undergo foreclosure as ways to get control of your debt and start over financially. Although bankruptcy and foreclosure can reduce or eliminate excessive debts and extinguish a mortgage obligation, they can also prevent you from getting another home loan for years to come. The Federal Housing Administration has programs that offer flexible qualifying terms for borrowers with credit challenges, and can help borrowers with serious derogatory credit become homeowners again.
Bouncing Back After a Bankruptcy
An FHA-backed lender can approve your application one year after making on-time payments on a Chapter 13 bankruptcy, and two years after a Chapter 7 liquidation bankruptcy. The court-appointed trustee for your Chapter 13 bankruptcy must give written permission for you to obtain a new home loan. The two-year clock on a Chapter 7 starts at the discharge of bankruptcy, which occurs several months after the filing. In addition to the prescribed time limits, you must have re-established good credit that meets or exceeds the FHA lender's standards. The FHA requires a 580 credit score for its minimum down payment requirement of
3.5 percent, but a lender may impose more stringent credit standards.
Moving Forward After Foreclosure
You can obtain an FHA-insured loan three years after a foreclosure. The FHA considers a foreclosure, in which a lender takes ownership of your home for non-payment, equivalent to a deed in lieu of foreclosure, in which you voluntarily deed the home to your lender. You must wait at least three years after either event to apply for an FHA loan. The same waiting period applies to a foreclosed home or deed-in-lieu on a primary residence or investment property.
Bankruptcy and Foreclosure Aftermath
A bankruptcy, which usually involves several accounts, typically affects your score more than a foreclosure, which impacts a single account -- your home loan. Both events can diminish your credit score by several hundred points, although their impact also depends on how high your scores were before the events. You can expect your score to decline by 130 to 240 points after bankruptcy, and by 85 to 160 points after a foreclosure, according to CNN Money. Borrowers with strong credit, in the high 700s, stand to lose more points than borrowers with fair or poor credit.
Extenuating Circumstance Exceptions