One of the frequently asked questions during today's booming housing market is can I qualify for a mortgage during Chapter 13 Bankruptcy. Chapter 13 Bankruptcy is a court-approved debt repayment plan where their debts are restructured over a period of three to five years. The individual pays a fraction of their debts to creditors under the supervision of the bankruptcy trustee for the term of the Chapter 13 Bankruptcy. Once the individual finish paying the monthly payments of their debts over their assigned specified period, whether it is three or five years, the balance of the debts is then discharged by the bankruptcy court. Once the bankruptcy has been discharged, the individual is debt free.
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 VA guidelines during Chapter 13 Bankruptcy is almost the same. We will cover and discuss qualifying for an FHA and/or VA loan during Chapter 13 Bankruptcy. Non-QM loans one day out of bankruptcy and/or foreclosure has no waiting period after bankruptcy and/or foreclosure with a 30% down payment. However, non-QM mortgage and alternative loan programs do not allow mortgage loan approvals 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. Trustee approval is required. 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 Bankruptcy repayment plan if the borrower will get a net tangible benefit due to the refinance. Homeowners with equity in their homes can get an FHA and/or VA cash-out refinance during the Chapter 13 repayment plan if they want to use the proceeds of the cash-out refinance to buy out the Chapter 13 Bankruptcy.
Not all mortgage lenders will approve qualified borrowers during Chapter 13 Bankruptcy repayment plan. There are two types of mortgage guidelines:
● Agency guidelines by HUD, VA, USDA, Fannie Mae, Freddie Mac
● Lender Overlays which are lending requirements that is above and beyond the minimum agency guidelines
All lenders need to meet the minimum agency guidelines of the individual loan program on government and/or conventional loans. However, lenders can have higher lending standards that is above and beyond the minimum agency guidelines called lender overlays. Most lenders will have lender overlays for borrowers who are in an active 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.
As mentioned earlier, VA and FHA guidelines on qualifying for a mortgage during Chapter 13 Bankruptcy repayment plan is almost identical with the exception of the down payment. All FHA and/or VA loans during Chapter 13 Bankruptcy need to be manually underwritten. Manual underwriting is similar to automated underwriting system approval except there is lower debt to income ratio cap. Higher debt to income ratio borrowers need up to two compensating factors.
Do I Meet The Minimum Agency Guidelines on FHA and/or VA Loans During Chapter 13 Bankruptcy?
Below are the basic bullet points on qualifying for an FHA and/or VA loan during Chapter 13 Bankruptcy repayment plan:
● 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, allow borrowers with under 580 credit scores and down to a 500 FICO 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
● Verification of rent is required on manual underwrites
● 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
There is not much difference between an automated underwriting system approval versus a manual underwriting file. Manual underwriting means a mortgage underwriter will manually underwrite the loan. More emphasis is placed on the borrower's ability to repay. The major difference in manual underwriting is the lower debt-to-income ratio guidelines. Here is how the debt-to-income ratio guidelines on manual underwriting works:
● 31% front-end and 43% back-end debt to income ratio with zero compensating factor
● 37% front-end and 47% back-end debt to income ratio with one compensating factors
● 40% front-end and 50% back-end debt to income ratio with two compensating factors
In this paragraph, we will cover and discuss qualifying for a mortgage after bankruptcy. FHA and VA loans have no waiting period requirements after the Chapter 13 Bankruptcy discharged date. However, if the Chapter 13 Bankruptcy discharge has not been seasoned for at least two years, it needs to be a manual underwrite. To qualify for a conventional loan after Chapter 13 Bankruptcy, there is a two-year waiting period. To qualify for a conventional loan after the Chapter 13 Bankruptcy dismissal date, there is a four-year waiting period requirement.
To check on the bankruptcy waiting period requirements, you can see the guidelines on all government and conventional mortgage guidelines on this link.