In this blog, we will cover the Fannie Mae Chapter 13 dismissal guidelines on conventional loans. One of the most frequently asked questions at Gustan Cho Associates is what the eligibility requirements is to qualify for a conventional loan after Chapter 13 Bankruptcy dismissal.
If you are considering bankruptcy or have recently filed, learn the four-year waiting period, possible two-year exception, and other criteria you must meet to get a mortgage after a Chapter 13 bankruptcy dismissal.
Homebuyers can qualify for FHA and VA loans with no waiting period requirements if the Chapter 13 Bankruptcy dismissal was voluntary such as an early payoff or Chapter 13 Bankruptcy Buyout. However, what is the Fannie Mae Chapter 13 dismissal guidelines on conventional loans? In the following paragraphs, we will discuss the Fannie Mae Chapter 13 Bankruptcy dismissal guidelines on conventional loans.
Fannie Mae Chapter 13 Dismissal Guidelines: When Can You Get a Mortgage?
If Fannie Mae (or any other conventional lender) is on your radar, a Chapter 13 dismissal doesn’t mean you will never have a mortgage again. However, Fannie Mae has a waiting period you must meet before you can move forward. Generally, Fannie Mae Chapter 13 dismissal guidelines stipulate a 4-year waiting period from the date of dismissal.
In some limited situations, borrowers may qualify in as little as two years, but this depends on the dismissal occurring due to documented extenuating circumstances.
You will also need to meet other criteria, including satisfactory credit, income, and assets; a favorable debt-to-income ratio; and a loan file that meets current underwriting guidelines. All content is for educational purposes and does not offer legal or credit repair services, nor guarantees mortgage approval.
What Is Chapter 13 Bankruptcy?
VA and FHA Loans allow for borrowers to qualify during the Chapter 13 Bankruptcy Repayment Period with Trustee Approval.
Fannie Mae and Freddie Mac are the two mortgage giants that set conforming guidelines on conventional loans. Borrowers cannot qualify for conventional loans during Chapter 13 Bankruptcy repayment. There are certain mortgage guidelines when it comes to qualifying for conventional loans with Chapter 13 Bankruptcy. In this article, we will cover and discuss Fannie Mae Chapter 13 dismissal guidelines on Conventional loans.
How Do Bankruptcies Work?
Consumers can file Chapter 7 or Chapter 13 Bankruptcy. Chapter 7 Bankruptcy is total liquidation. It is often for consumers with little to no assets and little to no income. Consumers who file Chapter 7 Bankruptcy can get all of their debts discharged and have a fresh financial start in life. It normally takes 90 days from the filing of Chapter 7 Bankruptcy to get the courts to get the debts discharged. Chapter 13 Bankruptcy is for consumers with steady jobs as well as assets to protect. A percentage of the consumer’s income is set aside by the Trustee. Once you file Chapter 13 Bankruptcy, you are going to get assigned a bankruptcy trustee.
The Role of a Bankruptcy Trustee
A bankruptcy Trustee is a lawyer appointed by the U.S. Bankruptcy Courts to oversee the petitioner once they file for Chapter 13 Bankruptcy. The trustee will advise and oversee the petitioner from the time they file bankruptcy until the bankruptcy repayment period is over.
The trustee will then distribute the percentage of the petitioner’s income and pay creditors accordingly. The payment plan is normally set up for 36 to 60 months.
After the payment plan is over, the U.S. Bankruptcy Courts will discharge all remaining debts. After the discharge of Chapter 13 Bankruptcy, the consumer has no remaining debts he or she is responsible for. Homebuyers need bankruptcy trustee approval if they intend to buy or refinance a home during the Chapter 13 Bankruptcy repayment plan.
Recently Had a Chapter 13 Dismissed? See If You Qualify Sooner Than You Think
Fannie Mae has specific rules after a Chapter 13 dismissal—and they’re different from discharge rulesWhat Does Chapter 13 Dismissal Mean?
A Chapter 13 bankruptcy is a court-supervised process that allows borrowers to repay debts through a structured repayment plan. A dismissal occurs when the bankruptcy process is terminated prior to the substantive completion of the repayment plan. A dismissal and a discharge are not the same. A discharge means the borrower has completed the Chapter 13 plan, and the court has approved the case’s closure. In a dismissal, the plan was not finished. This can be due to payments stopping, voluntary dismissal of the case, failure to submit the necessary documents, or other reasons that would lead the court to close the case.
Chapter 13 Dismissal Versus Chapter 13 Discharge
Fannie Mae treats dismissal and discharge differently. A borrower who has received a Chapter 13 discharge has a two-year waiting period that starts from the discharge date. A borrower who has received a Chapter 13 dismissal has a four-year waiting period that starts from the dismissal date. Because the repayment plan was not completed in a dismissal, Fannie Mae uses the longer period.
Fannie Mae Chapter 13 Dismissal Waiting Period
The dismissal of a Chapter 13 case has a waiting period that is regularly set at four years. For example, if the Chapter 13 case was dismissed by the bankruptcy court on August 10, 2022, then August 10, 2026, would mark the end of the four-year waiting period. The actual dismissal date should be verified by the lender using the necessary bankruptcy documents and should not be based on an entry on the credit report.
Should the Waiting Period Be Reduced to Two Years?
This is possible, but only in cases where appropriate extenuating circumstances are documented. That exception applies only when the facts support it. Fannie Mae has a two-year waiting period after a Chapter 13 dismissal if the dismissal occurred due to a nonrecurring event that was out of the borrower’s control and that event caused a marked and prolonged decrease in income or a significant increase in financial burden.
If you are applying to have a bankruptcy dismissed, request a copy of the dismissal order or court documents that indicate the case number and dismissal date. This helps avoid delays in the underwriting process.
Examples of such events include job loss, serious health problems, divorce, the death of the earner, and a major loss of money due to an insurable event, provided the borrower demonstrates how these events caused the bankruptcy. It is not sufficient to simply state that they created a financial burden.
Extenuating Circumstances Must Be Documented
More than just an explanation is required to grant the exception. Fannie Mae states that the lender must document the event and why the borrower had no other option to avoid the financial burden. That documentation is what supports the exception. Dale Elenteny a senior mortgage loan originator and associate contributing editor at GCA Forums says the following:
Helpful documents may include medical bills, layoff notices, severance letters, divorce decrees, insurance documentation, tax returns, lease agreements, or other documents related to the financial burden.
The borrower must also provide a letter explaining what happened, when it happened, how it impacted household finances, and why the Chapter 13 cannot be completed. The waiting period is counted from the date of dismissal, not from the date the Chapter 13 was filed or the date of the last payment made to the trustee. This is the date that starts the clock. Inaccurate or inconsistent bankruptcy reporting on a credit report is an important detail. Fannie Mae requires lenders to capture documentation if a credit report does not indicate that the bankruptcy has been dismissed and the dismissal date.
Waiting Period to Qualify for a Mortgage After Chapter 13 Bankruptcy Dismissal
Qualifying for a mortgage after a Chapter 13 bankruptcy dismissal can be challenging, but it’s not impossible. There are waiting period requirements depending on the mortgage loan program. In this section, we will consider factors to be taken into consideration.
Time since the Chapter 13 Bankruptcy dismissal is taken into consideration. Lenders typically want to see a waiting period after bankruptcy before considering you for a mortgage.
This waiting period can vary depending on the loan program you’re applying for. Chapter 13 bankruptcy dismissals are generally shorter than Chapter 7 bankruptcy dismissals.
Fannie Mae Chapter 13 Dismissal Guidelines on Credit Scores
Your credit score will significantly affect your ability to qualify for a mortgage. While bankruptcy can significantly negatively impact your credit score, it’s not the only factor lenders consider. It will improve your chances if you’ve been able to rebuild your credit since the dismissal and maintain a good payment history.
Mortgage lenders will also examine your current financial situation, including your income, employment history, and debt-to-income ratio.
Mortgage underwriters want to ensure that you can repay your income and make the mortgage payments. A larger down payment shows the borrower has skin in the game and shows lenders the borrower can offset a less-than-perfect credit history. If you can afford a large down payment, it may increase your chances of getting approved for a mortgage.
Fannie Mae Chapter 13 Dismissal Guidelines on Lender Requirements
Different lenders have different criteria for approving mortgages, so shopping around and comparing offers from multiple lenders is essential. Some lenders may be more willing to work with borrowers with a bankruptcy record than others. It’s crucial to speak with a mortgage lender or financial advisor who can assess your situation and provide guidance on the steps you can take to improve your chances of qualifying for a mortgage after a Chapter 13 bankruptcy dismissal.
Qualifying for Mortgage During and After Chapter 13 Bankruptcy
Homebuyers can qualify for mortgages during and after Chapter 13 Bankruptcy. VA and FHA loans allow borrowers to qualify for home loans during the Chapter 13 Repayment Plan after one year of timely payments to the Trustee. Conventional loans do not allow borrowers to qualify during the Chapter 13 Repayment Period. However, borrowers can qualify for conventional loans after the Chapter 13 discharge date after meeting the mandatory waiting period requirements.
Fannie Mae Chapter 13 Dismissal Guidelines on Waiting Period for Conventional Loans
Fannie Mae Chapter 13 Dismissal Guidelines on Conventional loans is different than FHA loans. With FHA and VA loans, there is no waiting period after Chapter 13 Bankruptcy dismissal to qualify. As long as the borrower has 12 months of timely payments in the past 12 months, they can qualify for FHA loans. There is no waiting period after the Chapter 13 Bankruptcy discharge date to qualify for VA and FHA loans. However, this is not the case with Conventional loans.
Can You Get a Fannie Mae Loan During an Open Chapter 13?
An open Chapter 13 case is generally considered ineligible for Fannie Mae loan programs, so the next step is to look at other financing options.
An open Chapter 13 case is generally considered ineligible for Fannie Mae loan programs. If TU does not provide a dismissal date, the loan will be considered ineligible.
This is why Chapter 13 borrowers in an active repayment plan have to consider alternative loan programs to finance their mortgage, rather than assuming a Fannie Mae conventional loan applies. More than one bankruptcy is likely to increase the waiting period or result in disqualification for obtaining a VA loan.
Fannie Mae Guidelines on Multiple Bankruptcies
If a borrower has more than one bankruptcy in the past seven years, a five-year waiting period from the latest bankruptcy discharge or dismissal date is usually mandatory for Fannie Mae.
A shorter waiting period of three years may apply if extenuating circumstances are documented. The most recent bankruptcy filing must be associated with documented extenuating circumstances.
In the case of jointly applying borrowers, they are not considered to have multiple bankruptcies just because each has one bankruptcy in their credit history. The lender assesses their records independently. When both borrowers apply together, each file is reviewed separately.
Can a Chapter 13 Bankruptcy Also Include a Foreclosure?
When bankruptcy and foreclosure are both associated with the same mortgage, it complicates the file. When bankruptcy and foreclosure are both associated with the same mortgage, it complicates the file. Fannie Mae may permit the bankruptcy waiting period to apply if the lender can show that the mortgage debt was discharged in the bankruptcy.
If the lender cannot show that the mortgage debt was discharged in bankruptcy, the longer of the applicable bankruptcy or foreclosure waiting period will apply.
This is one of the many reasons why a borrower should not rely solely on a credit score or an online pre-qualification service. The record of the mortgage debt, along with the foreclosure and bankruptcy records, must be corroborated with the credit report. That review helps determine which waiting-period controls apply.
How To Re-Establish Credit After a Chapter 13 Dismissal
Just because the waiting period has ended does not mean a mortgage will be approved. Fannie Mae expects a borrower to re-establish credit during the waiting period as well.
Traditional credit must be established, the waiting period must be met, and either a favorable DU recommendation or applicable manual underwriting requirements must be met.
A thin credit file or nontraditional credit will be insufficient following a major credit incident. Recent pay history is critical. Mortgage underwriters will evaluate your payment history following the dismissal to ensure you have practiced post-bankruptcy credit discipline. Payments should be made on all accounts in a timely manner. Payment history should avoid new late payments, overdraws, new collections, charge-offs, and a high overall balance. Before the mortgage application, the lines of credit on the balance should be as low as possible.
Address Debts Not Cleared By Bankruptcy
There may still be debts remaining after your Chapter 13 dismissal. These debts, per Fannie Mae, must be satisfied or an acceptable repayment plan must be instituted. A debt should not be assumed to be clear if it is a collection, tax balance, judgment, or repayment plan, even if the bankruptcy was dismissed. Bring all records to the lender early so the obligations can be accurately reviewed.
Records You May Need to Obtain a Mortgage After Chapter 13 is Dismissed
Requests for records will differ from lender to lender, but be prepared to present the order of dismissal, bankruptcy schedules if requested, a letter of explanation, and documentation of the extenuating circumstances.
You would generally need substantiating current income within 30 days for your most recent pay period, bank statements, identification, tax return filings for the last two or three years, and records of any remaining obligations or payment plans from the bankruptcy period.
Early submission of all your documentation helps the loan officer assess whether the standard four-year rule applies or whether a documented two-year extended-circumstances review may be warranted. That review determines which path comes next.
Why You Can Be Denied Even if the Waiting Period is Over
A Fannie Mae waiting period is an eligibility requirement and not a guarantee of approval. Even after the waiting period ends, the file must still satisfy all other requirements.
Even after the four-year waiting period, the lender must evaluate your credit score, recent payment history, debt-to-income ratio, and income stability, and review cash-to-close, the property type, the intended occupancy, and the DU Findings.
DU assesses substantial derogatory credit events along with other risk factors. Lenders also employ more stringent internal underwriting guidelines, also referred to as lender overlays. A lender may require a longer waiting period, a higher credit score, or a more stringent debt-to-income ratio than what Fannie Mae prescribes.
What to Do Before Applying for a Conventional Mortgage
First, verify the exact date of your Chapter 13 Bankruptcy dismissal from the court. Then, obtain a copy of your Credit Report, and check each Account for Errors regarding balances and Bankruptcy dates, or for Accounts with a Payment Plan that has not been set up.
Then do not incur any more debt before applying. Credit card debt or new loans will negatively impact your chances of mortgage approval.
Before making any offers, partner with a mortgage professional who can evaluate the entire file. A thorough evaluation should study the bankruptcy paperwork, credit report, income, and assets, and evaluate your debt-to-income ratio as well as the type of home you plan to purchase.
Fannie Mae Chapter 13 Dismissal Guidelines versus Discharge Guidelines
Fannie Mae Chapter 13 Dismissal Guidelines require borrowers to wait four years after the Chapter 13 Bankruptcy dismissal date. There is a four-year waiting period to qualify for conventional loans after the Chapter 7 Bankruptcy discharged date, a deed in lieu of foreclosure, or a short sale. There is a seven-year waiting period after foreclosure to qualify for conventional loans. There is a two-year waiting period after the Chapter 13 Bankruptcy discharge date to qualify for conventional loans.
Final Thoughts on Fannie Mae Chapter 13 Dismissal Guidelines
The dismissal of a Chapter 13 bankruptcy doesn’t mean the opportunity for homeownership is lost forever. In most cases, Fannie Mae will consider a borrower eligible four years after the bankruptcy has been dismissed, and a borrower may become eligible in two years (or even less) if there is supporting documentation of an eligible extenuating circumstance.
The most important steps are pulling the court records, practicing good credit habits, settling any outstanding debts, and getting the mortgage file professionally examined.
This is all done to ensure you are not applying too early and to increase your chances of being approved for a mortgage once you are eligible. The waiting period is four years after the Chapter 13 dismissal date. For more information about the contents of this article or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
FAQs for Fannie Mae Chapter 13 Dismissal Guidelines
Is There a Different Waiting Period for Voluntary Chapter 13 Dismissals?
There is no different waiting period for voluntary dismissals. In making an eligibility determination, the lender will likely review all court documents and the entire credit history.
Will Desktop Underwriter Approve a Loan Before the Four-Year Waiting Period Has Elapsed?
A standard Direct Submit request may be Ineligible if a Chapter 13 dismissal occurred in the last four years. However, if there are documented extenuating circumstances, the lender may be able to consider the loan under the specific Fannie Mae guidelines after a two-year period from the dismissal.
Do Paying Off Old Debts Restart the Chapter 13 Dismissal Waiting Period?
No. The waiting period is based on the Chapter 13 dismissal date. Paying off old debts does not restart the waiting period. However, outstanding obligations may be required to be satisfied or to be placed in a repayment plan.
What if My Credit Report Shows the Wrong Dismissal Date?
The lender will likely be required to either obtain court records or other necessary documents to verify the correct dismissal date. Fannie Mae provides a framework for lenders to correct inaccurate bankruptcy reporting on credit reports.
Can I Purchase a Second Home After Receiving a Chapter 13 Dismissal?
Yes, if the applicable waiting period has expired and all current underwriting standards have been met. Approval is dependent on the type of loan, the occupancy (of the unit purchased), the amount of the down payment, the credit profile, the reserves, the debt-to-income ratio, and the guidelines of the lender in question.
Can One Spouse Qualify Alone if the Other Spouse Had a Chapter 13 Dismissal?
In general, the spouse that is not in a Chapter 13 plan can qualify alone (even if the spouse in the Chapter 13 plan refuses to sign the application) if he or she has sufficient income, credit, assets, and debt to qualify. However, title requirements and state laws must be considered in relation to the application. Therefore, the loan structure must be assessed prior to the application.
Do All Conventional Mortgage Lenders Apply the Same Rules with Regard to Chapter 13?
No. In addition to the Fannie Mae requirements for loans submitted to Fannie Mae, other conventional loans may be offered to Freddie Mac or may be governed by other lender requirements. Some lenders may use their own stricter requirements in addition to the Fannie Mae guidelines.
How Often Do the Guidelines with Fannie Mae and Bankruptcy Change?
The Fannie Mae guidelines (link) are subject to change as selling guides and lender policies change. Automated underwriting systems may also change. It is vital that you check the date of your source. Outdated blogs, social media, and forums may not cite the current guidelines and can therefore be misleading.
