Buying a House While in Chapter 13 Bankruptcy

Buying a House While in Chapter 13 Bankruptcy


While on vacation in Chiapas, Mexico, I came across this article from Realty Biz News I don’t think we have touched on: can I qualify for a mortgage during Chapter 13 Bankruptcy?. 

Buying a House While in Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is a court-approved debt repayment plan where restructuring of their debts occurs over three to five years. The individual pays a fraction of their obligations to creditors under the supervision of the bankruptcy trustee for the term of the Chapter 13 Bankruptcy. Once discharged from bankruptcy, the individual is debt-free.

Mortgage Options During Chapter 13 Bankruptcy

Most lenders will want people to wait two years after Chapter 13 Bankruptcy discharge before they will approve you for a mortgage. However, FHA and VA loans are the only two mortgage loan programs that allow borrowers during Chapter 13 Bankruptcy to be eligible for a home mortgage.

FHA and/or VA Mortgage During Chapter 13 Bankruptcy Repayment Plan

Homebuyers and/or homeowners can qualify for an FHA and/or VA loan during Chapter 13 Bankruptcy one year into the Chapter 13 repayment plan. Lending guidelines on FHA and VA loans are almost identical. The borrower needs to have made 12 monthly timely payments on their bankruptcy repayment. The Trustee requires approval . Almost 100% of the time, a bankruptcy trustee will approve a mortgage on a home purchase. The trustee will also most likely approve a refinance during Chapter 13

Finding a Mortgage Lender Who Can Help You Qualify for a Mortgage During Chapter 13 Bankruptcy

Not all mortgage lenders will approve qualified borrowers during the Chapter 13 Bankruptcy repayment plan. Therefore, the first step is to find a lender that has no lender overlays for borrowers during an active Chapter 13 Bankruptcy repayment plan.

FHA Versus VA Loans During Chapter 13 Bankruptcy

All FHA and/or VA loans during Chapter 13 Bankruptcy need manual underwriting. Manual underwriting is similar to automated underwriting system approval except there is lower debt to income ratio cap.

● To qualify for a 3.5% down payment FHA loan, you would need a minimum of a 580 credit score

● HUD, the parent of FHA, allows borrowers with under 580 credit scores and down to a 500 Fto ICO to qualify for FHA loans with a10% down payment

● VA loans do not require any down payment

● Lenders offer 100% financing on VA loans

● VA loans do not have a minimum down payment requirement with an AUS approval or can meet the manual underwriting guidelines

● Borrowers need to be in an active Chapter 13 Bankruptcy for at least 12 months with timely payments throughout the repayment period

● A late payment is not always a deal killer depending on the circumstances

● Manual underwriting requires verification of rent

● If the borrowers do not have rental verification and are living rent-free, that would be acceptable if they can get a living rent-free letter form signed by the person who they are living rent-free from

● Must get approval from the Bankruptcy Trustee, which is normally not a problem

For a Mortgage After Bankruptcy

Most lenders will want people to wait two years after Chapter 13 Bankruptcy discharge before they will approve you for a mortgage. However, FHA and VA loans are the only two mortgage loan programs that allow borrowers during Chapter 13 Bankruptcy to be eligible for a home mortgage.

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