FHA Bankruptcy Guidelines | FHA Loans During and After Bankruptcy

FHA loans are government-insured mortgages. The government insurance makes them less risky for lenders, which in turn means that borrowers can get loans with less equity and/or while paying less interest than they could otherwise. This additional reassurance of repayment makes them the perfect loans for people in bankruptcy.

Getting an FHA Loan While Bankrupt

The FHA process adds some requirements to the usual requirements for a loan, such as two years of steady employment, two years of steady or increasing income, only one or no thirty-days late payments in the last two years, minimum credit score of 620, and a maximum new mortgage payment equal to 30% of gross income. In addition, there are requirements relating specifically to bankruptcy:

Chapter 7 bankruptcy: An FHA loan is only available when at least two years have passed since discharge.

Chapter 13 bankruptcy: A borrower can get an FHA loan while still paying under a Chapter 13 repayment plan, but payments under the plan must have been satisfactorily made for at least one year—and the bankruptcy trustee must provide written approval for the loan.

With these hurdles, what’s the advantage of FHA loan? Assuming you qualify, lenders know they’ll be repaid—which means they are more willing to overlook the bankruptcy and extend the loan. They’ll also typically offer better terms than someone who filed bankruptcy would get if they did not have their loan insured. In order words, if you meet the FHA criteria and qualify, you will find credit more available to you than it would be otherwise.

Declaring Bankruptcy With an FHA Loan

The FHA’s role in an FHA loan is insuring it. Once the loan is originated, from the borrower’s point of view, it doesn’t matter whether it is an FHA or non-FHA loan (apart from getting better terms, that is). Therefore, FHA homeowners don’t need to do anything special or different about their FHA mortgage than a non-FHA mortgage when declaring bankruptcy. Reaffirm the loan if it is a Chapter 7 bankruptcy to avoid foreclosure; or in a Chapter 13 bankruptcy, keep paying the mortgage under the Chapter 13 plan.

It may be possible for your lender to receive some payment or incentives from FHA to restructure your loan if you’re facing financial difficulty to keep you in the home and avoid foreclosure. When you experience financial distress, if you contact your lender, they can in turn contact Federal Housing Authority to see if this is possible. If it is, you may need to assist them with some paperwork. A lien may be placed on your home by the government to secure the money it pays the lender, but this is done at very favorable terms.

How A Bankruptcy Attorney Can Help

Bankruptcy can be very complex—even picking the correct type (Chapter 7 or 13) for your situation. Negotiating with lenders can be complex, too. Don’t go into this on your own—let an attorney advise and represent you, so you can pick and execute the strategy that will let you keep your home or get the new financing you need.

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