FHA Loan During Chapter 13 Bankruptcy Process Mortgage Guidelines

This Article Is About FHA Loan During Chapter 13 Bankruptcy Process Mortgage Guidelines

Can I Qualify For FHA Loan During Chapter 13 Bankruptcy is one of the most common questions homebuyers ask. Chapter 13 Bankruptcies generally have a three to five-year repayment period prior it can be discharged. Three to five years is a long time for a person not to be able to purchase a home during this booming housing market. The great news is homebuyers can qualify for an FHA and/or VA loan during the Chapter 13 Bankruptcy repayment plan without the Chapter 13 Bankruptcy being discharged.

FHA and VA loans are the only two loan programs that allow borrowers during the Chapter 13 Bankruptcy repayment plan to qualify for a home mortgage. The automated underwriting system will not render an approve/eligible findings for borrowers during the Chapter 13 Bankruptcy repayment period. The AUS will render a refer/eligible. Therefore, it needs to be a manual underwrite. FHA and VA loans are the only home loan programs that allow manual underwriting. Not all mortgage companies can do manual underwriting. However, Gustan Cho Associates are experts in FHA and VA manual underwriting. A large percentage of our business are manual underwrites.

Eligibility Requirements To Qualify For An FHA Loan During Chapter 13 Bankruptcy Process

Home Buyers can qualify for FHA Loan one year into the Chapter 13 Bankruptcy:

  • Chapter 13 Bankruptcy does not have to be discharged.
  • Need approval of Chapter 13 Bankruptcy Trustee.
  • HUD, the parent of FHA, requires that the home buyer needs to have at least 12 months payment history.
  • Payment history needs to be timely for at least 12 months with no late payments during the Chapter 13 Bankruptcy repayment plan.
  • All FHA Loan During Chapter 13 are manual underwriting.

Only FHA-approved lenders who are able to do manual underwriting can do FHA Loan During Chapter 13 repayment plan.

Importance Of Verification Of Rent On Manual Underwriting

Verification Of Rent is normally required, but not always necessary, on manual underwriting. The importance of verification of rent is to determine payment shock. Lenders want to know that borrowers have a history of paying monthly housing payments for the past 12 months. The new mortgage payment should be close to their rental payment. The difference in the new mortgage payment versus rental payments is known as payment shock.  Gustan Cho Associates will exempt rental verification if the borrower lives rent-free with family. Rent Free letter provided by Gustan Cho Associates needs to be completed, signed, and dated in order to be used in lieu of verification of rent.

FHA Manual Underwriting On Chapter 13 Mortgage Loans

FHA Manual Underwriting Guidelines apply when qualifying for FHA Loan During Chapter 13 Bankruptcy Process. One of the criteria with manual underwrites is that verification of rent is required. The only way verification of rent can be valid is by providing 12 months of canceled checks the renter has paid to their landlord. Or 12 months of bank statements showing that the monthly rental payments have been paid out of the renter’s bank account into the bank account of the landlord. All 12 months of rental payments need to have been made timely. No late payments are allowed in the past 12 months in order for the verification of rent to be valid.

If the renter has been renting their apartment and/or home from a registered property management company, the following can apply:

  • the VOR provided and signed by the property manager of the property management company can be used in lieu of 12 months canceled checks and/or 12 months bank statements

FHA Loan During Chapter 13 Bankruptcy Process: Why Is Verification Of Rent So Important

Why Is Verification Of Rent So Important

All FHA Loan During Chapter 13 Bankruptcy Process are manual underwriting. All FHA manual underwriting requires verification of rent. Verification Of Rent is extremely important because it determines rental payment shock.

Payment Shock is the difference between what a new home buyer is paying for rent to what he or she will be paying on his or her new mortgage payment. For example, if a renter is paying $1,000 for rent and his or her new proposed housing payment, P.I.T.I. (Principal, Interest, Taxes, Insurance) is $1,500. The new home buyer will have a payment shock of 50%. The lower the payment shock, the better lenders will view the borrower.

Importance Of Compensating Factors On Manual Underwriting

A lower payment shock is considered a compensating factor. Compensating Factors are positive factors of borrowers. Without verification of rent, the payment shock cannot be proven. This is because the borrower is going from paying zero monthly rent to a new housing payment, P.I.T.I. Those who are living with family or cannot provide verification of rent and are seeking an FHA loan During Chapter 13 Bankruptcy Process can get a rent-free. letter completed, signed, and dated in lieu of VOR. Rental Verification is mandatory by most lenders because they have lender overlays on VOR.

Borrowers who are paying their rental payments timely but are paying with cash and are getting a paid receipt by their landlords do not have a valid verification of rent. This holds true even with a cash-paid receipt by the landlord. Cash payments do not count in the mortgage. Only 12 months of canceled checks and/or bank statements is what can be used for verification of rent. Verification of rent can be waived at Gustan Cho Associates if the borrower has been living rent-free with family so they can save money for the down payment and closing costs on a home purchase.

FHA Loan During Chapter 13 Bankruptcy Process: Late Payments After Bankruptcy

Lenders require borrowers to have been timely with all of their monthly payments during and after their Chapter 13 Bankruptcy Process. The past 24 months of the repayment period will be looked at very carefully with regard to monthly timely payments.

Late payments during the Chapter 13 Bankruptcy repayment plan will be carefully looked at and it will not be viewed favorably. Same with late payments after a Chapter 13 Bankruptcy discharge. Lenders do not like to see any late payments on any of the borrower’s creditors during and/or after a Chapter 13 Bankruptcy discharged date.

Most lenders will not approve and automatically deny any borrowers who had any late payments during and after a Chapter 13 Bankruptcy. Gustan Cho Associates can work with borrowers who had a few late payments during and after a Chapter 13 Bankruptcy. This only holds true if they have a good letter of explanation on why they were late and it was not due to financial irresponsibility.

We can also help borrowers to see if we can work with the creditor. See if the creditor can help in getting the late payments removed. Or advice with some other credit repair alternative program to offset the late payments during the Chapter 13 Bankruptcy repayment period.

If you had any late payments during and/or after a Chapter 13 Bankruptcy and cannot qualify for an FHA Loan with another lender, please contact me at 262-716-8151 or text us for a faster response. Or email us at [email protected]

FHA Loan During Chapter 13 Bankruptcy Process And Qualification Requirements

FHA Loan During Chapter 13 Bankruptcy Process And Qualification Requirements

Although HUD, the parent of the Federal Housing Administration or FHA, allows FHA Loan During Chapter 13 Bankruptcy Process. Most lenders have FHA Investor Overlays. Investor Overlays are additional lending guidelines where the individual lender places on top of the minimum HUD mortgage guidelines. For example, HUD allows the home buyers to qualify for an FHA Loan During Chapter 13 Bankruptcy Process. However, a lender may not allow it.

Lenders may not accept any borrowers who had a Chapter 13 Bankruptcy until two years after a Chapter 13 Bankruptcy discharged date. This holds true even though borrowers meet all the minimum HUD guidelines and qualify for an FHA loan. Lenders can have additional lending requirements that is above and beyond the minimum HUD agency guidelines on FHA loans. The higher lending requirements from the mortgage company that is above and beyond the minimum HUD agency guidelines are called lender overlays. Lender overlays are very common by most mortgage companies. Gustan Cho Associates has no lender overlays on government and conventional loans.

Minimum credit scores required to qualify for FHA Loan During Chapter 13 Bankruptcy Process for a 3.5% down payment FHA home purchase loan is 580 FICO. HUD allows borrowers with credit scores down to 500 to qualify for an FHA loan. Any borrowers with under 580 FICO and down to 500 credit scores require a 10% versus a 3.5% down payment per HUD guidelines.

Permission By The Bankruptcy Courts

Chapter 13 Bankruptcy Trustee approval is necessary: Most Chapter 13 Bankruptcy Trustees will approve. We ever had an issue with a Chapter 13 Bankruptcy Trustee not approving a home purchase for an FHA Loan During Chapter 13 Bankruptcy Process. Verification Of Rent is definitely required unless it can be substituted with a rent-free letter. This is because all FHA Loan During Chapter 13 Bankruptcy Process are manual underwrites. All manual underwriting FHA Loans require verification of rent.

No late payments are allowed for FHA Loan During Chapter 13 Bankruptcy Process. At least 12 months’ worth of payments needs to have been made to all creditors in the Chapter 13 Bankruptcy Repayment Plan. Compensating Factors will be looked at. Compensating factors can offset late payments and/or other derogatory credit tradelines and/or events.

What Are Compensating Factors That Is Acceptable

Examples of compensating factors include the following:

  • reserves
  • larger down payment
  • income such as part-time income or second jobs that the borrower has but is not used to qualify in the mortgage loan approval process

If you need an FHA loan During Chapter 13 Bankruptcy Process and are looking for a lender with no FHA Investor Overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] I am available 7 days a week, evenings, weekends, and holidays to take your phone calls or emails and answer any questions you may have.

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