FHA Chapter 7 Bankruptcy

Filing a Chapter 7 bankruptcy means a straight liquidation of the debtor’s non-exempt assets and most debts are wiped out immediately upon bankruptcy discharge; therefore, no payment plan is required after filing. Although this sounds like a good deal, filing a Chapter 7 is a huge red flag for future potential creditors and results in borrowers being denied for credit cards, loans, and mortgages.

This can be a major hurdle for many, but as time passes by, it affects a person’s credit less and less.

When it comes to buying a house after bankruptcy, home loans have a guideline called a bankruptcy waiting period. With a Chapter 7 bankruptcy, lenders look at how much time has passed. The more time that has elapsed, the higher the number of mortgage options are available. One of the most lenient home loan programs for Chapter 7 bankruptcy is an FHA loan. It is even possible for an FHA loan with one credit score!

Chapter 7 FHA Bankruptcy Waiting Period

To qualify for an FHA loan after a Chapter 7 bankruptcy, the following is required…

• At least 2 years elapsed since bankruptcy discharge
• Sufficient re-established good credit or a potential borrower has chosen not to incur new credit obligations

OR

• Between 12 months and two years have elapsed since discharge
• Bankruptcy caused by extenuating circumstances beyond borrower’s control, and
• documented ability to manage financial affairs responsibly

FHA Chapter 13 Bankruptcy

Unlike a Chapter 7, a Chapter 13 bankruptcy requires several years of payments prior to discharging debts. Usually, 3 – 5 years is the typical chapter 13 payment term. Additionally, this type of bankruptcy also creates a major hurdle in establishing many types of credit. This includes mortgage loans. But, getting an FHA loan after bankruptcy is possible quicker than other home loan types. It’s even possible to get an FHA loan while in a Chapter 13 bankruptcy!

Chapter 13 FHA Bankruptcy Waiting Period

Whether in a chapter bankruptcy or discharged after making all payments, FHA has certain requirements for loan approval…

• At least 12 months of on-time bankruptcy payment history
• Bankruptcy and other credit payments made on-time
• If not discharged, the borrower must have written permission from bankruptcy court to enter a mortgage

How to Establish Credit After Bankruptcy

When it comes to getting an FHA loan approval after a major derogatory credit event such as foreclosure, short sale, or bankruptcy, establishing new credit patterns again is key.

Lenders need to see that a potential borrower’s situation has improved, and that all their payments are paid after such an event. So, there are two main points to remember when it comes to re-establishing credit during the FHA bankruptcy waiting period. First, is realize that it is possible to get new credit, though options are limited. Secondly, do not wait until years after a bankruptcy or after a Chapter 13 discharge to begin trying to rebuild credit.

Best Way to Establish New Credit

When it comes to credit scoring, a credit card has the biggest and quickest effect on a credit score. 30% of a credit score is based on balances compared to high credit limits on revolving accounts like credit cards.

Therefore, opening a new credit card, charging a very small amount, paying off the balance in full and on time, then repeating every month will help boost your score. By carefully doing so, you afford yourself the opportunity to make on-time payments with low interest and get a lot of credit score points for a low balance.

A friendly tip: it is best to stay under 10% of your credit limit. With a $300 credit limit, charge less than $30 per month for maximum scores.

How to Get a Credit Card in the FHA Bankruptcy Waiting Period

Like we said earlier, there are not many credit options after a bankruptcy; but there are some.

Secured credit cards are usually the only way to go. These involve paying an up-front fee or deposit to “secure” the card. By paying a fee or deposit, it reduces the lender’s risk. Consider this fee as a cost of obtaining credit.

Again, do not wait to start with new credit. Get one or two new credit accounts as soon as possible. The earlier one starts, the quicker 12 months of re-established credit will be obtained.

Believe it or not, it is possible to get a very respectable credit score quickly if using the right tools.

Do you have questions? Don’t hesitate to reach out to one of OVM Financial’s Loan Officers! Give us a call today.