Of Course You Can Qualify for a Mortgage After Bankruptcy, FHA Says

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

October 6, 2011

One of the things that troubles those considering filing personal bankruptcy is the fear that it might be impossible to qualify for a home mortgage after a chapter 7 or 13 case.  Indeed, it would be a cruel irony if a bankruptcy filing freed you at last from a heavy debt burden, enabling you to finally afford a house payment, only to find that you were now a member of a no-credit underclass, shunned forever by mortgage lenders, permanently consigned to a cot in your parents’ basement.

If this has been a factor in your thinking about bankruptcy, there is good news for you: the federal home mortgage guaranty agency says that bankruptcy will not stop you from qualifying for a mortgage to buy a home.  Better still, you don’t have to rely on this writer’s credentials or anecdotal evidence to know that bankruptcy won’t stop you from buying a home.  FHA and HUD regulations, publicly available to anyone who cares to look, say in so many words that a chapter 7 or 13 filing will not disqualify a borrower from eligibility for an FHA-insured mortgage.

Regarding chapter 7 bankruptcy, HUD Guideline 4155.1 : 4.C.2.g provides:

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy.

During this time, the borrower must have

  • re-established good credit, or
  • chosen not to incur new credit obligations.

An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

  • can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
  • has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note:  The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.

Regarding chapter 13 bankruptcy, HUD Guideline 4155.1 : 4.C.2.h provides:

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that

  • one year of the pay-out period under the bankruptcy has elapsed
  • the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
  • the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

TOTAL Scorecard Accept/Approve Recommendation

Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.  If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter.

Reference:  For more information on the TOTAL Scorecard recommendations, see the TOTAL Mortgage Scorecard User Guide.

What’s more, because bankruptcy usually relieves you of most or all of your monthly debt payments, the above regulations make clear that filing bankruptcy could actually help you to qualify for an FHA mortgage, rather than preventing you from qualifying.  This would be true for those whose monthly debt payments leave them with insufficient income to pay a mortgage, but for whom a bankruptcy filing would eliminate those monthly payments, freeing up the disposable income necessary to qualify for the monthly mortgage payment.

Additionally, if you are not a first time home buyer, you should be aware that conventional mortgage lenders typically follow regulations similar to those followed by HUD and the FHA.

This doesn’t mean that everyone who wants to buy a home should file bankruptcy first, but it does mean that persons considering bankruptcy can be free of the fear that a bankruptcy filing will prevent them from ever qualifying for a mortgage.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: October 7, 2011