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FHA Loan During Chapter 13 Bankruptcy Process Mortgage Guidelines

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FHA Loan During Chapter 13 Bankruptcy Process Mortgage Guidelines

This BLOG On FHA Loan During Chapter 13 Bankruptcy Process Mortgage Guidelines Was UPDATED On September 27th, 2018

Can I Qualify For FHA Loan During Chapter 13 Bankruptcy Process?

Home Buyers can qualify for FHA Loan During Chapter 13 Bankruptcy Process 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 Bankruptcy Process are manual underwriting
  • Only FHA approved lenders who are able to do manual underwriting can do FHA Loan During Chapter 13 Bankruptcy Process

Importance Of Verification Of Rent On Manual Underwriting

Verification Of Rent is normally required, but not always necessary, on manual underwriting.

  • Importance of Verification of Rent is to determine payment shock
  • Lenders want to know that borrowers have history of paying monthly housing payment for 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 at Loan Cabin Inc. will exempt rental verification if 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 Guidelines applies 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 rental payments needs 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

All FHA Loan During Chapter 13 Bankruptcy Process are manual underwriting.

  • All FHA manual underwriting require 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
  • 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 a 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 but not required
  • Those 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 canceled checks and/or bank statements is what can be used for verification of rent

Again, verification of rent can be waived at Gustan Cho Associates Mortgage Group at Loan Cabin Inc.

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

Lenders require borrowers have been timely during and after their Chapter 13 Bankruptcy Process.

  • Late payments during 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 discharge date
  • Most lenders will completely deny any borrowers who had any late payments during and after a Chapter 13 Bankruptcy
  • However, Gustan Cho Associates at Loan Cabin Inc. can work with FHA 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
  • 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

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

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 home buyer to qualify for a 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 is overlays is extremely common
  • 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
  • Chapter 13 Bankruptcy Trustee approval is necessary
  • Most Chapter 13 Bankruptcy Trustee’s will approve
  • We ever had an issue with a Chapter 13 Bankruptcy Trustee not approving a home purchase for a FHA Loan During Chapter 13 Bankruptcy Process
  • Verification Of Rent is definitely required unless it can 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 of 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

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 a FHA Loan During Chapter 13 Bankruptcy Process and are looking for Lender with no FHA Investor Overlays, please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. 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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