Chapter 13 Cash-Out Refinance Guidelines During Repayment Plan

This ARTICLE On Chapter 13 Cash-Out Refinance Guidelines During Repayment Plan Was PUBLISHED On November 30th. 2020

Homeowners are eligible for FHA loans during Chapter 13 Bankruptcy repayment plan with Trustee Approval.

  • HUD, the parent of FHA,  allow homebuyers and homeowners to be eligible to qualify for FHA loans during the repayment plan
  • This holds true for both purchase and refinance transaction
  • The borrower does not need Chapter 13 discharged
  • To be eligible, the borrower needs to have  been in  Chapter 13 Bankruptcy repayment plan for at least 12 months
  • They need to have made 12 timely payments to the bankruptcy trustee with no late payments
  • Chapter 13 Cash-Out Refinance Guidelines allow homeowners with equity to do a cash-out refinance and pay off the Chapter 13 balance
  • It needs to be manual underwriting
  • Manual underwriting guidelines apply
  • Trustee Approval is required
  • Many people worry about getting trustee approval
  • Trustees will approve a mortgage transaction 
  • Gustan Cho Associates never had a bankruptcy trustee not approve a mortgage during Chapter 13 bankruptcy repayment

In this article, we will cover and discuss Chapter 13 Cash-Out Refinance Guidelines During Repayment Plan.

HUD Agency Chapter 13 Mortgage Guidelines

Chapter 13 Cash-Out Refinance Guidelines

To simplify explaining Chapter 13 Cash-Out Refinance Guidelines, we will cover the general HUD Agency Mortgage Guidelines with regards to Bankruptcy.

Here is the HUD Agency Bankruptcy Mortgage Guidelines:

  • There is a two-year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA loans
  • Borrowers can qualify for both purchase and refinance FHA loans during Chapter 13 repayment plan after 12 months into the plan with Trustee Approval
  • Chapter 13 does not need to be discharged
  • Timely payments during Chapter 13 bankruptcy repayment plan is required
  • It needs to be a manual underwrite
  • If the borrower has equity in their home and is eligible for a cash-out refinance, they can proceed and use the cash-out proceeds to pay off their Chapter 13 debt balance
  • There is no waiting period requirements after Chapter 13 bankruptcy discharged date
  • Paying the Chapter 13 bankruptcy debt earlier than the set payment date is also referred to as a Chapter 13 bankruptcy buyout
  • By doing so, the bankruptcy petitioner will be paying Chapter 13 earlier than the anticipated date

Gustan Cho Associates are experts in helping borrowers qualify for a mortgage while in Chapter 13 Bankruptcy.

Chapter 13 Cash-Out Refinance Guidelines On Paying Chapter 13 Early

Homeowners in Chapter 13 Bankruptcy who have equity in their homes can pay Chapter 13 early by doing FHA Cash-Out Refinance while they are in an active repayment plan. Bankruptcy Trustee Approval is required.

Here is how you are able to pay Chapter 13 debt earlier than the planned scheduled date:

  • Need to be in the repayment plan for at least 12 months and make timely payments
  • Qualify with a lender that does FHA manual underwriting
  • Find out how much equity they have
  • FHA allows up to 80% loan to value with cash-out refinance
  • Get approval by the Bankruptcy Trustee

Many borrowers worry about the approval of the Trustee. Most trustees will approve this. In the countless borrowers, Gustan Cho Associates have helped during Chapter 13 Bankruptcy, me and my team never had an issue with the Trustee. The loan officer can go over the figures with you and see how much you can save and help in doing Chapter 13 bankruptcy buyout.

Manual Underwriting GuidelinesWhat are Manual Underwriting Guidelines

Manual underwriting is only allowed on FHA and VA loans.

  • Any borrowers in Chapter 13 Bankruptcy repayment without being discharged will not get approve/eligible per automated underwriting system
  • They will get refer/eligible findings
  • With refer/eligible per AUS, it can be downgraded to a manual underwrite
  • There is no difference between automated versus manual underwriting
  • The major difference is the debt to income ratio caps are lower on manual underwrites
  • Borrowers with high debt to income ratios need compensating factors
  • Verification of rent is normally required on manual underwrites unless the borrower is living rent-free with a family member
  • Gustan Cho Associates will exempt rental verification if the borrower can provide they are living rent-free with a family member
  • Timely payments in the past 24 months are required on manual underwrite
  • One or two late payments in the past 12 months is not always a deal killer

If debts are included in Chapter 13 bankruptcy, then only 12 months of timely payments are required.

Importance Of Compensating Factors For Borrowers With High Debt To Income Ratio

Compensating Factors are positive factors considered by lenders. Compensating factors plays an important role in making mortgage underwriters decisions on approving borrowers with higher debt to incomer ratio on manual underwrites.

Examples of compensating factors are the following:

  • Payment shock of less than $100 dollars from going from renting to their new housing payment is considered strong compensating factors
  • Having a second job for at least one year or longer but not used as qualifying income
  • Larger down payment shows the buyer is putting skin in the game and lessens the risk by the lender
  • Borrower has a history of consistent income increases and job promotion
  • Same job with history of promotions and increases and the borrower getting certifications/higher education to further their careers
  • The above example could be a police officer getting promoted to sergeant, lieutenant, captain, deputy chief and going to night school for his bachelor’s, master’s, and/or doctorate degree while working to further their careers
  • Non-borrowing spouse whose income is not used to qualify for the mortgage

FHA and VA loans are the only two loan programs that allow manual underwriting. The noticeable different between manual versus automated underwriting is the cap limits placed on manual underwriting. Mortgage underwriters have a lot of power and discretion when it comes to manual underwriting. Underwriters can use underwriter discretion in their decision on manual underwrites. Compensating factors is important on manual underwrites. Both FHA and VA loans require compensating factors when it comes to approving borrowers with higher debt to income ratios.

Here are the recommended DTI versus compensating factor guidelines on manual underwriting on FHA and VA loans:

  • The maximum front end debt to income ratio is 31% and back end DTI is 43% for borrowers with zero compensating factors
  • Maximum 37% front end and 47% back end DTI with one compensating factors
  • Maximum 40% front end and 50% back end DTI with two compensating factors

To qualify for FHA Loan during Chapter 13 repayment, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. We are also experts on non-QM loans and alternative financing loan programs. We have a national reputation of being a one-stop mortgage shop. 

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