HUD Chapter 13 Bankruptcy Guidelines On FHA Mortgages
This article covers HUD Chapter 13 Bankruptcy Guidelines On FHA Mortgages
HUD Chapter 13 Bankruptcy Guidelines And Eligibility Requirements On FHA Mortgages:
Gustan Cho Associates are the gurus when it comes to closing your FHA loan during or after a chapter 13 bankruptcy. Most Americans are not aware of the FHA mortgage guidelines around chapter 13 bankruptcy. In my experience, even some bankruptcy attorneys are not up to date with the FHA guidelines and sometimes give their clients the wrong advice.
In this article, we will discuss and cover Chapter 13 mortgage guidelines on FHA mortgages in the calendar year of 2021 and how to apply for FHA loans during and after Chapter 13 Bankruptcy with Gustan Cho Associates.
HUD Chapter 13 Bankruptcy Guidelines On FHA Mortgages During And After Repayment Period
Most mortgage lenders will tell you it is not possible to obtain a mortgage during a chapter 13 bankruptcy.
This is because they do not participate in manually underwriting mortgages or they have LENDER OVERLAYS that get in the way. Manual underwriting overlays are some of the most common in the mortgage industry. The majority of banks will only close mortgage loans that have approved eligible automated underwriting system findings.
For more information on automated underwriting systems, please read our AUS BLOG.
HUD Chapter 13 Bankruptcy Guidelines Versus Lender Overlays
Since we do not have lender overlays and do allow manual underwriting, we have become the chapter 13 FHA mortgage experts. As you can tell from our website, we write blogs about this topic quite often. Below are the steps to obtain a mortgage while in a chapter 13 bankruptcy or less than two years discharged from a chapter 13 bankruptcy. (any mortgage less than 2 years discharged from a chapter 13 bankruptcy will be downgraded to a manually underwritten loan per FHA guidelines). HUD guidelines can be confusing. The HUD 4000.1 FHA Handbook details FHA mortgage guidelines and is well over 1000 pages long. Don’t expect the average borrower to understand these mortgage guidelines, that is our job. In this handbook, chapter 13 mortgage guidelines are explained in detail.
The main items that need to be addressed are manual underwriting requirements and trustee permission to enter a new mortgage. Anytime a bankruptcy is detected on your credit report, your file will be downgraded to a manual underwrite. Even if your chapter 13 bankruptcy is discharged, you will require a manual underwrite until your discharge is seasoned for two full years.
HUD Chapter 13 Bankruptcy Guidelines On FHA Mortgages On Manual Versus Automated Underwriting
Manual underwriting requirements surrounding chapter 13 bankruptcy:
There are some basic manual underwriting requirements that must be met to qualify for an FHA mortgage during a chapter 13 bankruptcy, we will dive into those now.
HUD Down Payment Guidelines On FHA Loans
Down Payment Guidelines:
If you have a credit score of 580 or above, you only need a 3.5% down payment. If your scores are below 580, you will need to put down at least 10%. Typically, when in an active chapter 13 bankruptcy, your credit scores will hover around 580 – 600. Please read this blog on ways to INCREASE YOUR CREDIT SCORE to increase your chances of approval.
HUD Chapter 13 Bankruptcy Guidelines On FHA Mortgages: Debt To Income Ratio
Debt To Income Ratio:
Debt to income is a key aspect of qualifying for any mortgage. The debt-to-income requirements are more strict when manual underwriting is involved. Depending on your credit score and compensating factors, your debt to income requirements will change.
- Credit scores below 580 (including no credit score) are limited to DTI ratios of 31/43
- Credit scores 580 and above are limited to 31/43 without compensating factors
- Credit scores 580 and above are limited to 37/47 with one compensating factor
- Credit scores 580 and above are limited to 40/40 with no other debt
- Credit scores 580 and above are limited to 40/50 with two compensating factors
Please click here to learn about COMPENSATING FACTORS
HUD Chapter 13 Bankruptcy Guidelines On Trustee Approval
- This part of the process scares many potential borrowers who are in an active chapter 13 bankruptcy
- While you are in your repayment plan, you must be granted permission from your trustee to enter into a mortgage
- Your bankruptcy attorney can help you with this process
- You will need to send the trustee a preapproval letter and an estimation of lending fees
- They will review the documentation and approve or deny your request to buy a home
- Typically, if your mortgage payment is close to what you’re paying in rent, they will sign off on you entering a mortgage
- If your mortgage payment will be significantly higher than your current rental payment, they may ask for more information
- They may want to see your current finances to make sure you can afford the payment
- Sometimes they will even increase your chapter 13 payment due to higher income
You want to make sure you talk this through with your real estate attorney before contacting the trustee.
Major Noticeable Changes To HUD Chapter 13 Bankruptcy Guidelines
The key change for 2021:
Loan amounts and maximum loan limits:
- The good news is in the calendar year of 2021, you can now borrow even more money to buy a more expensive home while in a chapter 13 bankruptcy
- Depending on your debt to income qualifications, the maximum loan amount in most counties across the country is $356,362
- This number is adjusted every year based on home price index information collected throughout the country
- The increase in the loan amount is designed to help Americans buy affordable housing with FHA backed mortgages
- The Federal Housing Finance Agency (FHFA) will publish home price index data annually
Now that you understand the basics of buying or refinancing a home while currently in a Chapter 13 Bankruptcy or less than two years discharge from your bankruptcy, give us a call. We are the experts in bankruptcy mortgage financing. We encourage you to check out our reviews and our YouTube CHANNEL. Our team continues to stay up to date on all guideline changes! For any mortgage questions, please call Mike Gracz on 630-659-7644.