FHA Rules on Bankruptcy
The Federal Housing Administration has helped more than 26 million Americans buy homes, according to federal figures. The FHA insures mortgage lenders against loss, which makes lenders willing to accept lower down payments: Rather than the standard 20 percent, an FHA-insured homebuyer with good credit may only need 3.5 percent down to buy a house. Even if you've gone through bankruptcy, you may still be able to qualify for an FHA loan.
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Requirements
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The FHA has standards all borrowers have to meet, the U.S. Department of Housing and Urban Development states. You must prove you've had a steady income -- whether it's wages, stock dividends, child support or any other source -- for at least three years, and that you consistently pay your bills on time. You need a credit score of at least 580, which would qualify you for a 10 percent down payment; to make a 3.5 percent, your score has to be higher.
Chapter 7
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In Chapter 7 bankruptcy, a court-appointed trustee sells off some of your possessions and assets to pay your creditors; the court then wipes out your remaining debts, except for categories such as child support and recent back taxes, which have to be paid. To qualify for an FHA loan, you have to wait until two years after the court erases your debts. You also have to rebuild your credit score to the point you qualify: Bankruptcy can knock 100 points off your score, Consumer Credit Counseling Services states.
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Chapter 13
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In Chapter 13, you devote three or five years of disposable income -- the money left over after you pay living expenses and priority debts such as child support -- to paying off credit-card bills, medical debts and other obligations. At the end of that time, the court wipes out your debts, with exceptions similar to Chapter 7. If you meet all the other FHA qualifications, you can apply after the first year of the payment plan, providing you've made the payments on time and that the bankruptcy court approves your taking on a new mortgage.
Explanations
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If you're applying for an FHA loan while going through Chapter 13, you need to explain the circumstances behind the bankruptcy. The FHA wants to hear that it resulted from circumstances you couldn't control. In Chapter 7, you only have to provide an explanation if you want a loan before two years have elapsed. In that case, the explanation has to be truly catastrophic, such as a crippling illness or the death of your family's primary wage-earner.
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