FHA Bankruptcy Rules

FHA mortgages can make it easier for many Americans to buy a home. They have low credit score requirements and minimal down payments (3.5%), and they’re readily available nationwide.

They can also be a good choice for homebuyers who have filed for bankruptcy — something that over 500,000 consumers did between September 2023 and September 2024, according to United States Courts data.

Your finances will need to have improved, of course, and you’ll usually need to get through a waiting period, too, but qualifying for an FHA loan with a bankruptcy on your record is absolutely possible.

Did you file for bankruptcy in the past? Here’s how you can qualify for an FHA loan and buy a home.

FHA Loan Bankruptcy Rules

Having a bankruptcy on your record can make it difficult to qualify for loans and other financial products, but with FHA mortgages, there’s a defined path forward. The exact rules will depend on what type of bankruptcy you filed (Chapter 7 or Chapter 13).

Here’s how those two types of bankruptcies differ:

FHA Chapter 7 Bankruptcy Rules

If you file for Chapter 7 bankruptcy, then you have to go through what the FHA calls a “seasoning period” — basically a two-year waiting period between when your debts were discharged and your loan application.

You will also need to have re-established good credit in that time period. That means you’ve taken on and managed credit cards and debts responsibly, and that your credit report shows a consistent history of on-time payments. You may also need to provide your lender with a letter of explanation detailing how you ended up in bankruptcy and what you’ve done to change your finances in the years following it.

Keep in mind that just because the appropriate time has passed since your bankruptcy doesn’t mean you’ll qualify. If you’ve continued to show financial instability, have high debt balances, or have been late on monthly payments, a lender will likely deny your application for a loan due to a high risk of default. 

FHA Chapter 13 Bankruptcy Rules

With Chapter 13 bankruptcy, there’s no waiting period with FHA loans, per se. Instead, you can apply for your loan after making at least one year of on-time payments toward your court-ordered repayment plan.

You will also need to submit documentation proving those payments were made, and the court you filed bankruptcy in will need to provide written permission for you to apply for the loan.

Again, showing that you are financially stable and responsible in the time since your bankruptcy was filed is of the utmost importance when applying for a loan. Make sure you’re making all your payments on time and keeping debts low if you plan to get a mortgage.

How Lenders Evaluate Borrowers After Bankruptcy

When you’re applying for a mortgage after filing for bankruptcy, lenders are paying close attention to the risk you present — specifically, how high the risk is that you skip payments and default on your loan.
For this reason, honesty and thorough documentation are critical. Lenders need to see proof that you’ve turned a corner and are now able to manage your debts responsibly, as this shows them you can be trusted to pay your new mortgage payment on time, too. Your credit report can lend credence to this, but so can your letter of explanation.

For instance, you could use a letter of explanation to detail how sudden medical bills or an unexpected job loss led to your bankruptcy, but hard work, determination, and proper budgeting have helped you get back on track ever since. This would go a long way in reducing the risk you present in a lender’s eyes (versus, say, a bankruptcy that just stemmed from overspending or poor financial habits that have continued even after the fact).

Lenders will also take into account financial factors as they relate to risk. For example, a high debt-to-income ratio and small down payment will increase the risk you present (they mean less disposable income and higher loan payments), whereas lower DTIs and larger down payments will do the opposite. The factors that help your case — low DTIs, large down payments, a flush savings account, lots of income, etc. — are referred to as “compensating factors.”

Tips For Getting an FHA Loan After Bankruptcy

If you’re looking to get an FHA loan after going through bankruptcy, there are some steps you can take to improve your chances. First, work to rebuild your credit. Keep your credit card balances low, avoid taking out new loans, and always make your payments on time. You should also check your credit report regularly to ensure there are no errors.

You should also keep your income consistent (or even increase it if possible) and try to save up for a decent-sized down payment. Both of these will help reduce the risk you present to a lender.

Finally, work hard on your letter of explanation. Walk through the conditions that led to your bankruptcy and detail all the steps you’ve taken to improve your financial health ever since. Your letter should assure lenders that you can be trusted to make your payments on time, every time, even years down the road.