"I have a borrower with a Chapter 7 bankruptcy discharged 2 years and 1 month ago. They want to buy a house with 3.5% down. Can we do this deal? Walk me through the guidelines."
Short answer: Yes. Your borrower clears FHA's bankruptcy seasoning requirement. Here's the complete breakdown.
The Waiting Period Rule
Per HUD 4000.1 Section II.A.4.b.iii, FHA requires 2 years from the Chapter 7 discharge date—not the filing date, not the 341 meeting, the discharge.
Your borrower is at 25 months post-discharge. They're past the mandatory waiting period by one month. Box checked.
What FHA Actually Requires
Clearing the 2-year seasoning is necessary but not sufficient. The borrower must also demonstrate:
Re-established Credit
Minimum two tradelines active for 24 months, OR one tradeline active 24 months plus 12 months clean housing payment history (rent verification via VOR or canceled checks)
No New Derogatory Credit
Post-BK credit must be clean. New collections, charge-offs, or late payments kill the deal or force manual underwrite
Stable Income
2-year employment history with current pay stubs, W-2s, tax returns as applicable
AUS Path vs. Manual Underwrite
If the borrower has genuinely rebuilt credit post-BK:
Manual UW adds documentation burden but doesn't kill the deal. You'll need:
- Written LOE for the bankruptcy (medical, job loss, divorce—something beyond "I overextended")
- 12-month housing payment history verified
- Compensating factors (reserves, low DTI, residual income)
The 3.5% Down Question
FHA minimum down payment is 3.5% with a 580+ FICO. If your borrower rebuilt to 580+, the down payment works. Below 580, you're at 10% down minimum—different conversation.
At 25 months post-discharge with 3.5% down, assuming 580+ mid-score, 2 active tradelines (24 months), no post-BK derogatories, and stable 2-year employment—this loan underwrites.
Run it through DU first. If you get Approve/Eligible, you're golden. If you get Refer, manual UW with solid compensating factors gets it done.
Watch Out For
- Dismissed vs. Discharged Dismissed BK means debts weren't discharged. Different animal entirely, often requires 12-month seasoning plus full debt inclusion.
- Chapter 13 in the Mix If borrower had a 13 converted to 7, the clock starts from the 7 discharge.
- Post-BK Judgments or Liens Must be paid or in payment plan with 3-month history.
FHA vs. Conventional: BK Waiting Periods
For context, here's how FHA stacks up against other loan types:
| Loan Type | Waiting Period | Min Down Payment | Notes |
|---|---|---|---|
| FHA | 2 years | 3.5% | From discharge date |
| VA | 2 years | 0% | From discharge date |
| USDA | 3 years | 0% | From discharge date |
| Conventional | 4 years | 3% | From discharge date |
FHA and VA offer the shortest path back to homeownership after Chapter 7. That's exactly why your borrower is looking at FHA with 3.5% down.
Key Takeaways
- 2-year rule from discharge: At 25 months, your borrower clears it
- Credit rehabilitation matters: Clean post-BK tradelines are essential
- 580+ for 3.5% down: Below 580 requires 10% minimum
- DU first, manual if needed: Strong files get automated approval
- The deal hinges on rebuilding: Not the bankruptcy itself
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