FHA Loan After Chapter 13 Bankruptcy Mortgage Guidelines

This article covers qualifying for an FHA loan after Chapter 13 bankruptcy. Many homebuyers are often told they cannot qualify for an FHA loan during the Chapter 13 Bankruptcy repayment plan. Many are also told they need to wait two years after the Chapter 13 Bankruptcy discharge date. This is not true.

Over 80% of our borrowers at Gustan Cho Associates could not qualify for a mortgage due to lender overlays on government and conventional loans. Not all mortgage lenders have the same lending guidelines. Most lenders have overlays on government and conventional loans. This article will discuss whether I qualify for an FHA loan after Chapter 13 Bankruptcy.

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Can I Get a Mortgage While In Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy repayment plan is normally five years. Home prices have been skyrocketing in recent years. Home prices have increased by over 40% in the past two years. So, can you imagine what home prices will be in five years. What if you cannot buy a house when you are in a Chapter 13 repayment plan. The chances are that you will be priced out of the housing market.

We will discuss how homebuyers and homeowners can qualify for an FHA loan after filing a Chapter 13 Bankruptcy just one year into the repayment plan with trustee approval. We will not tell you what you want to hear but the facts. We will show you how to qualify for a mortgage after filing Chapter 13 Bankruptcy without having the 13 discharged.

What Mortgage Loan Option Do I Have To Get a Home Loan While In Chapter 13 Bankruptcy?

Most mortgage loan programs do not allow borrowers in an active Chapter 13 Bankruptcy to be eligible for a home loan. However, FHA, VA, and non-QM loans allow borrowers in an active Chapter 13 Bankruptcy to be eligible for home loans without the Chapter 13 Bankruptcy being discharged.

We will go over getting a home mortgage during Chapter 13 Bankruptcy repayment versus discharge. We will answer the question: Can I purchase a home and refinance an FHA loan during Chapter 13 Bankruptcy repayment? Homeowners with equity in a Chapter 13 repayment plan often ask if they can get a cash-out FHA loan during the Chapter 13 Bankruptcy repayment plan to buy out Chapter 13 early. Gustan Cho Associates are experts in helping borrowers get approved and closed on FHA loans during and after Chapter 13 Bankruptcy on home purchase and refinance transactions.

When Can I Qualify for an FHA Loan After Filing Chapter 13 Bankruptcy?

Under HUD guidelines, home buyers and homeowners can qualify for an FHA home loan after filing Chapter 13 Bankruptcy after 12 months into the repayment plan with trustee approval. There is no waiting period to qualify for an FHA loan after Chapter 13 bankruptcy. A Chapter 13 bankruptcy usually takes five years to complete.

Under a Chapter 13 plan, the bankruptcy trustee sets a monthly payment for the debtor. The debtor pays into the plan every month for up to five years. When the bankruptcy period is up, any remaining balances are discharged. You may be able to apply for an FHA mortgage while paying into a Chapter 13 plan after one year into the repayment plan.

Does the Chapter 13 Bankruptcy Need to Get Discharged For FHA Loan?

Homebuyers and homeowners can qualify for an FHA loan while in an active Chapter 13 Bankruptcy. You must wait 12 months after filing Chapter 13 Bankruptcy to be eligible for an FHA loan. It needs to be a manual underwrite, and you would need trustee approval. You do not have to wait until the Chapter 13 Bankruptcy is discharged.

There is no waiting period after the Chapter 13 Bankruptcy has been discharged to qualify for an FHA loan at Gustan Cho Associates. Many lenders may require a two-year waiting period after the Chapter 13 Bankruptcy discharge date to qualify for an FHA loan.

Mortgage Lenders With No Waiting Period on FHA Loan After Bankruptcy

At Gustan Cho Associates, we do not require a waiting period after the Chapter 13 Bankruptcy discharge date for borrowers to qualify for an FHA loan on both purchase and refinance transactions. This holds on cash-out refinance FHA loan transactions.

Chapter 13 bankruptcy is like a consumer credit counseling agency debt management plan. Instead of making your monthly payment to a counselor, you make it to a bankruptcy trustee. To apply for an FHA mortgage while in a Chapter 13 bankruptcy, you must get the approval of your bankruptcy trustee.

gage After Chapter 13 Bankruptcy

Mortgage lenders treat applicants with Chapter 13 bankruptcies differently from those who file for Chapter 7 bankruptcy. The difference between the two is that Chapter 13 filers pay some or all of what they owe their creditors over time, while most Chapter 7 filers discharge their debts without repaying anything. These are called “no asset” filings.

FHA Loan After Chapter 13 Bankruptcy Versus Chapter 7 Bankruptcy

FHA mortgage lenders are more likely to approve applicants who file for Chapter 13 than those who file for Chapter 7 bankruptcy. That’s because Chapter 13 filers repay some of their debts. You can see the difference in waiting periods following the different filings:

Chapter 7 bankruptcy: 2 years after discharge
Chapter 13 bankruptcy: 12 months after filing

FHA Loan During And After Chapter 13 Bankruptcy

Once your Chapter 13 bankruptcy is discharged, you can apply for an FHA mortgage immediately. This holds without any special conditions. But you need written permission from your bankruptcy trustee to apply for an FHA home loan while still paying into a Chapter 13 plan if you are in an active repayment plan.

Many worry about the trustee not approving a mortgage during a Chapter 13 Bankruptcy repayment plan. There is no reason to worry. Bankruptcy Trustees will always sign off on a mortgage for a home purchase and a refinance. This holds true as long as the home is reasonably priced, not a mansion.

How to Get Approval From Your Bankruptcy Trustee For A Mortgage

Choosing a loan amount that won’t increase your housing expense by too much is best. “Too much” is generally defined as $100 or 5%, whichever is less. Next, you or your attorney will file a motion with your bankruptcy court requesting approval to buy a home with an FHA mortgage. Note that it can take up to 45 days to schedule the hearing for your motion. So don’t go house shopping before you’ve nailed down your approval from the court and your lender.

Motion To Bankruptcy Trustee For Mortgage Approval

Your motion should include this information:

The terms of the proposed home purchase include the purchase price, down payment amount, down payment source, and monthly payment, including principal, interest, property taxes, and homeowners insurance
Proof of your current income
Your budget includes the new house payment
How will it impact your creditors

Normally, if the new mortgage won’t result in less money available to your creditors, the trustee will approve the request to finance a home with an FHA mortgage. Your chances are decent if your new house payment won’t exceed your current housing expense by much or at all. However, if your new mortgage payment is $1,000 more than your current rent, you’ll have a hard time. In that case, you may be able to get trustee approval by finding extra income — perhaps a part-time job or by renting out part of your home to a roommate.

FHA Waiting Period After Chapter 13 Bankruptcy

If you apply for an FHA mortgage within two years of filing for Chapter 13 bankruptcy, your lender cannot underwrite your application electronically. Instead, a human underwriter reviews your application manually, leaving much of your application information open to interpretation.

You want to make your application as strong and convincing as possible for the person deciding your fate. A good loan officer can help you with the extra things you can do to improve your chances. It’s very helpful, for instance, if you take steps to re-establish credit and prove that you can manage your finances and pay your debts.

What Are Examples of Extenuating Circumstances?

HUD guidelines specifically state that an applicant’s choice not to use credit should not be cause for denial of a mortgage. It’s to your advantage to show that your bankruptcy was caused by a situation over which you had no control and was, therefore, not your fault. Here are some examples of mitigating circumstances that might get you better treatment:

Massive layoff at your workplace
A catastrophic illness that increased your expenses or decreased your income substantially.
The death or illness of the primary wage earner in your household
Self-employment is significantly harmed by a global event like the coronavirus pandemic of 2020
Being a crime victim

How Mortgage Underwriters Evaluate Borrowers With Bankruptcy

Note that the FHA specifically mentions that divorce is not a mitigating circumstance. Nor is the inability to sell your home after a job transfer to another location. It would be best if you also showed the human underwriter that you are unlikely to experience another bankruptcy. For instance, you found another job after losing the old one and have passed your probation period. You’ve regained your health after a serious illness or medical bankruptcy. You use credit conservatively now, and your income is more than sufficient to cover your current expenses plus the new mortgage. Work with your lawyer and loan officer to make your case with your lender. An experienced loan officer will work with your bankruptcy attorney in getting your trustee to approve your mortgage.

Verification of Rent Requirement

All manually underwritten FHA home loans require verification of your housing expense, whether rent or a mortgage payment. You’ll need to prove that you’ve paid your rent or mortgage on time over the last 12 months. If your mortgage appears on your credit report, you don’t have to do anything more. If you pay rent, your lender will send your landlord a Verification of Rent form.

How Do Lenders Verify Rental History

Alternatively, you can provide 12 months of canceled checks or bank statements proving on-time payment. But what if you’re living rent-free? Homebuyers saving up a down payment often live with family or friends rent-free for some time. Many lenders find this unacceptable and will decline your mortgage application. That’s not a requirement of the FHA program; it’s an overlay. Gustan Cho Associates imposes NO OVERLAYS and can qualify borrowers living rent-free as long as the reason is to save money for a down payment on the home purchase.

Underwriting Guidelines for FHA Loan While In Chapter 13 Bankruptcy

There are additional requirements to qualify for an FHA home loan while in a Chapter 13 repayment plan. You need:

A minimum credit score of 580
At least 3.5% down (but more is better if your qualifications are not strong)
Sellers can contribute up to 6% for closing costs. This should free up more of your cash for a down payment or reserves
Documentation of your income — pay stubs and W-2s for wage earners (two years), tax returns with all schedules for self-employed borrowers, and those who earn at least 25% of their income from commissions or bonuses
Income that is enough to cover your current debts plus your new mortgage payments
Underwriters prefer it if your total monthly debt payments (living costs like utilities and child care don’t count) don’t exceed 31% front end and 43% back end with no compensating factors
Maximum 37 front end and 47 back ends with two compensating factors
40% front end and 50% back end if you have two compensating factors

No late payments during and after the bankruptcy filing.

What Are Compensating Factors For Manual Underwriting

Compensating factors are things that lower the risk to your lender. Here are a few:

Additional down payment than the minimum required
Cash reserves and savings show strength
Conservative use of credit and high credit limit
Lower debt-to-income ratio
Other income not used to qualify as income, such as boarder income, money from a new part-time job, bonus or self-employment income that you’ve received for less than two years
A high credit score (yes, you can have a high FICO score even after bankruptcy)

HUD Guidelines on Chapter 13 Dismissal Versus Discharge

Not every bankruptcy filing results in the discharge of your debts. Sometimes, your filing is dismissed instead of discharged. A discharge means you’ve completed your court-ordered repayment plan. You made your bankruptcy plan payments on time and improved your finances.

If you want to buy a house after Chapter 13 discharge, there’s no waiting period for an FHA, VA, or USDA loan. For a conventional loan, there’s a 2-year waiting period after Chapter 13 discharge.

What Is a Bankruptcy Dismissal Versus Discharge?

A dismissal might happen if the court finds that you were dishonest in your filing — for instance, you hid income or assets or ran up bills right before filing bankruptcy. You can also request a dismissal if you suddenly acquire the money to repay your creditors, decide that you don’t want to file for bankruptcy, or find that you can’t afford the Chapter 13 payments.

When you have a bankruptcy dismissal, it’s as though there was no bankruptcy filing. If you qualify for a mortgage, there is no waiting period. More likely, though, the same problems that caused you to consider bankruptcy will continue to affect your credit and make it hard to obtain financing.

Alternatives to FHA Loans In Chapter 13 Bankruptcy

FHA mortgages are probably the cheapest and best home financing after bankruptcy. However, they’re not always possible. You can’t use an FHA loan to purchase an investment property. Or to buy a condo in a non-FHA-approved community. You may not be eligible for government-backed mortgages if you owe money to a government agency.

Finally, the FHA limits the amount it will guarantee, and you might need to borrow more. In that case, your options are conventional (non-government) financing from a mortgage lender or private “hard money” financing from individuals or groups of investors.

Non-QM Loans Versus Traditional Mortgage Programs

Some alternative mortgage programs (Non-QM, Alt-A, or Non-Prime) offer home loans to people in Chapter 13 plans. These loans are riskier to lenders because there is no mortgage insurer or government agency to bail them out if they default. But they may be appropriate if you want to borrow higher loan amounts or wait less before buying a home.

Expect to pay higher interest rates and fees and make a higher down payment. Please contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans.