FHA Derogatory Credit Rules: Bankruptcies & Foreclosures

FHA is one of the most accessible loan programs following a bankruptcy. However, the timeline and process differ entirely based on which chapter you filed.

Chapter 7: when does the clock start?

Under FHA guidelines, a Chapter 7 bankruptcy does not disqualify a borrower if at least two years have elapsed since the date of discharge. During those two years, the borrower must have either re-established good credit or chosen not to incur any new credit obligations.

The 12-Month Loophole: You may be eligible for an FHA loan just 12 months after a Chapter 7 discharge if the bankruptcy was caused by documented "Extenuating Circumstances" beyond your control (like a severe illness or death of a primary wage earner), and you have exhibited flawless financial management since the event.

Can I qualify while still in Chapter 13?

A Chapter 13 bankruptcy is unique because you are actively paying back creditors. You do not need to wait for the bankruptcy to be discharged to buy a home.

• Qualifying During the Payout: You are eligible for an FHA loan while still in the bankruptcy payout period if at least 12 months have elapsed, all payments have been made on time, and you receive written permission from the bankruptcy court.
• Qualifying After Discharge: If your Chapter 13 has been fully discharged, there is effectively no waiting period. However, if the discharge was less than two years ago, the automated system will likely require a manual underwrite.

Losing a home is a major derogatory event, but the FHA provides a clear path to homeownership exactly 36 months after the incident resolves.

How long after a foreclosure or deed in lieu?

A borrower is generally not eligible for an FHA-insured mortgage if they had a foreclosure or a Deed-in-Lieu of foreclosure within the three-year period prior to the date of case number assignment. The clock starts on the date the title of the property formally transferred from the borrower, not the day the borrower moved out.

Is a short sale treated differently?

A short sale typically carries the exact same three-year waiting period as a foreclosure. However, the HUD handbook outlines a massive exception for borrowers who proactively managed their finances before the sale:

• The 0-Day Exception: A borrower is considered completely eligible for a new FHA mortgage with no waiting period if they were entirely current on their mortgage and all other installment debts at the time of the short sale, and the proceeds from the sale served as an agreement in full.

Can the waiting period be shortened?

To reduce waiting periods (such as dropping a Foreclosure wait from 3 years down to 12 months), a borrower must prove the event was caused by an extenuating circumstance. FHA strictly defines this as a non-recurring event that was completely out of the borrower's control resulting in a sudden, prolonged, and significant loss of income.

• What Qualifies: Severe, prolonged medical illness, or the sudden death of a primary wage earner.
• What DOES NOT Qualify: Divorce, inability to sell the home due to a job transfer, or an adjustable-rate mortgage resetting to a higher payment.