FHA Chapter 13 Manual Underwriting Guidelines On FHA Home Loans

FHA Chapter 13 Manual Underwriting Guidelines on FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss the FHA Chapter 13 Manual Underwriting Guidelines on FHA loans. In the following sections of this guide on FHA Chapter 13 manual underwriting guidelines, we will be discussing and covering the FHA Chapter 13 Manual Underwriting Guidelines during and after Chapter 13 Bankruptcy. As we enter the calendar year of 2020, we want to refresh our readers on FHA manual underwriting guidelines for borrowers currently in a chapter 13 bankruptcy or less than two years discharged from a chapter 13 bankruptcy. Bankruptcy laws are put in place to help Americans in a tough financial situations. A chapter 13 bankruptcy is a way to reorganize your outstanding debt and a plan to partially pay your creditors back. This is a nice way to hit the reset button on your financial obligations. When entering bankruptcy, your mortgage qualifications will be affected.

Can You Get an FHA Mortgage While in Chapter 13?

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Homebuyers can qualify for an FHA mortgage while in Chapter 13 Bankruptcy one year after the filing date of Chapter 13. The same rule applies for rate and term refinance. You can qualify for a Cash-Out Refinance FHA loan to Buy Out the Chapter 13 Bankruptcy early during the bankruptcy repayment plan. If you decide to file a Chapter 13 bankruptcy, you will need to wait two years from your discharge date to enter into a conventional mortgage. The good news is you can still utilize an FHA or VA mortgage to purchase or refinance a property before that two-year mark. In this blog, we will focus on FHA mortgages during chapter 13 bankruptcy. We will cover and discuss how some lenders accept the agency FHA Chapter 13 Manual Underwriting Guidelines during and after the Chapter 13 Bankruptcy discharged date, while other lenders will not. Do FHA lenders have different requirements on FHA loans? Many will be surprised how not all lenders have the same requirements on the same loan programs. We will thoroughly discuss and cover lender overlays versus agency guidelines.

What Is Chapter 13 Bankruptcy

Definition of chapter 13 bankruptcy:

  • According to the ADMINISTRATIVE OFFICE OF THE U.S. COURTS, chapter 13 Bankruptcy code provides for an adjustment of debts of an individual with regular income chapter 13 will allow you to maintain your property and pay your debts back over time
  • The repayment plan is usually a three or five-year repayment period
  • Chapter 13 will reschedule secured debts and extend the payments over chapter 13 repayment
  • It will also protect you from direct contact with creditors

Chapter 13 bankruptcy was put into policy to help struggling Americans get back on their feet.

FHA Chapter 13 Manual Underwriting Guidelines During Repayment Plan

Now that we understand what chapter 13 bankruptcy means, we will go over your FHA mortgage qualifications now. Once you enter your formal chapter 13 repayment agreement, you must make 12 consecutive on-time payments to your trustee before you are eligible to apply for an FHA mortgage. This payment history is very important. Any missed payments to the trustee can disqualify you from obtaining an FHA mortgage. Assuming you have already made your 12 payments, it is time to apply for an FHA mortgage with Gustan Cho Associates.

How To Apply For an FHA Loan While In Chapter 13 Bankruptcy

Homebuyers in a Chapter 13 repayment plan can qualify for an FHA mortgage while in chapter 13 bankruptcy. First, you will call Mike Gracz on (800) 900-8569. You and Mike will have a one-on-one mortgage consultation to go over your true qualifications. From there you will be sent an email with an application link and a list of documents we need to start the process.

Those documents are below:

  • Chapter 13 Paperwork
  • Last 60 Days Bank Statements – to source down payment
  • Last 30 Days Pay Stubs
  • Last Two Years W2’S
  • Last Two Years Tax Returns – not always required
  • Driver’s License

Once you have the required documentation and the application link filled out, you will be paired with a licensed loan officer in your state.

FHA Loans During And After Chapter 13 Bankruptcy

Your mortgage loan officer will qualify you based on FHA manual underwriting guidelines. There will be a maximum payment you qualify for. At this point, you will need to get permission from your trustee to enter into a mortgage. Your bankruptcy attorney and the trustee will grant or deny your ability to enter into a new mortgage. Nine times out of ten, they will approve you to enter the FHA mortgage. Even though you may be in bankruptcy, the trustee still wants to see you better your financial picture. Obtaining a home versus paying rent is a great way to build equity. Assuming your mortgage payment does not add PAYMENT SHOCK to the equation, the trustee will sign off on this purchase transaction.

Chapter 13 Buy-Out With an FHA Cash-Out Refinance Mortgage 

If you are looking to refinance your property, you will still need permission from the trustee to enter into a new mortgage. If you are trying to utilize the cash-out mortgage, it is important to understand that the cash-out proceeds must pay off your trustee in full. If you end the payment plan early by paying it off, certain creditors may be able to come back after you for more money. Please contact your bankruptcy attorney for specifics. Typically, revolving creditors are able to come back for more funds after paying off your chapter 13 bankruptcy early. If this is a rate and term refinance transaction and you’re lowering your payment, most of the time the trustee will sign off. If you are lowering your term, such as going from a 30-year mortgage to a 15-year mortgage, your payment may increase. If your payment is going to increase, you will need to justify you can afford the higher payment with your trustee. This can create some confusion and possibly reopen your bankruptcy. The information in this blog is for informational purposes and each bankruptcy is different. You must contact your bankruptcy attorney for specifics on your chapter 13 payment plan.

Manual Underwriting Guidelines on FHA Loans

Chapter 13 Manual Guidelines On Refinance Transactions

Borrowers who cannot get an approve/eligible per automated underwriting system (AUS) and get a referred/eligible per AUS, may qualify for manual underwriting. However, they need to meet the manual underwriting guidelines. In order to qualify for an FHA manual underwriting loan, the following key points need to be met. Below are the key manual underwriting key bullet points for borrowers.


  • Need to be timely on all payments in the past 24 months
  • Verification of rent is required on all manual underwrites
  • Gustan Cho Associates can exempt verification of rent for borrowers who are living rent-free with family
  • Borrowers in a Chapter 13 Bankruptcy need to have their FHA loans underwritten via manual underwrite
  • Borrowers with a recent Chapter 13 Bankruptcy and the discharge has not been seasoned for at least 24 months, the file needs to be a manual underwrite
  • Do not let the term manual underwrite scare you
  • We are the experts in FHA Chapter 13 manual underwriting, our reviews speak for themselves

Since we specialize in manually underwritten loans, we are here to assist you with any questions.

FHA Chapter 13 Manual Underwriting Guidelines on Late Payments

Here are a few items to keep an eye out for:

  • Must be on time for all housing payments for the past 12 months and no more than two 30-day late payments in the past 24 months
  •  If you are not paying rent, a rent-free letter may be utilized
  • No major derogatory missed payments on revolving credit cards
  • No more than one 90-day late or three 60-day late payments allowed
  • Must have one month of cash reserves after closing costs
  • Debt to income thresholds are based on compensating factors
  • A detailed letter of explanation will be required for any derogatory credit events

HUD Reserve Requirements on FHA Chapter 13 Manual Underwriting

HUD requires reserves on manual underwriting. Reserves on FHA manually underwritten loans need to be the borrower’s own funds. Reserve funds on manual underwrites cannot be gifted. You cannot use seller concession credit or lender credit to meet FHA Chapter 13 manual underwriting reserve requirements. FHA Chapter 13 manual underwriting reserve requirements is one months of principal, interest, taxes, and insurance on one to two unit homes. On three to four unit multi-family homes, FHA Chapter 13 manual underwriting reserve requirements is three months of reserves which means three months of PITI.

Best FHA Mortgage Lenders For FHA Chapter 13 Manual Underwriting

If you are currently in a chapter 13 bankruptcy and looking to purchase or refinance a house, please reach out today. We are the experts in FHA manual underwriting. While the majority of banks do not participate in manual underwriting, our staff is experienced and how to get your loan to the finish line. For any questions or specifics on your loan scenario, please call Mike Gracz at (800) 900-8569 or send an email to gcho@gustancho.com. We are available seven days a week including holidays. We do all we can to take the stress out of the mortgage process. If you have a difficult manual underwrite, we can utilize our TBD UNDERWRITING PROCESS. We look forward to your call.

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