Underwriting Tip – Bankruptcy Waiting Periods – FHA

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.

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: In cases of prior bankruptcy, ANY derogatory for ANY reason after the bankruptcy credit will be highly scrutinized and likely cause the underwriter  to deny the loan application.