FHA Policies Toward Borrowers With Previous Bankruptcies
In general, if you’ve been involved in a bankruptcy, an FHA loan, such as the 203b loan, may be easier to acquire than conventional home financing. FHA rules state that Chapter 7 bankruptcies are not a disqualifying factor from getting an FHA loan “if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge”, and during that period, the borrower:
Re-establishes good credit
Does not take on new credit
However, a borrower may actually obtain an FHA loan as little as 12 months after bankruptcy if they can demonstrate that “the bankruptcy was caused by extenuating circumstances beyond the borrower’s control, and the borrower has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.” In addition, the lender needs to provide evidence that the borrower is unlikely to go bankrupt again in the future.
Borrowers who have gone through a Chapter 13 bankruptcy may also be eligible for FHA loans, as long as they have gone through one year of satisfactory payment periods, and “the borrower has received written permission from the bankruptcy court to enter into the mortgage.”
Previous Foreclosures and 203b Loans
If a lender has foreclosed on your primary residence, you will typically have to wait at least three years from the date of the foreclosure sale in order to be eligible for an FHA loan. However, there is an exception to this; “if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure” they may be able to get an FHA loan sooner.
This three-year rule also applies to situations in which an individual completed a deed in lieu of foreclosure, or a short sale.