Home Loan After Chapter 13 Bankruptcy Mortgage Guidelines

Home Loan After Chapter 13 Bankruptcy Mortgage Guidelines

This BLOG On Home Loan After Chapter 13 Bankruptcy Mortgage Guidelines Was UPDATED On August 9th, 2018

What are Home Loan After Chapter 13 Bankruptcy Mortgage Guidelines

Home buyers can qualify for home loan after Chapter 13 Bankruptcy one day after the Chapter 13 discharged date.

There are two types of Bankruptcies:

  1. Chapter 7 Bankruptcy
  2. Chapter 13 Bankruptcy

The waiting periods to qualify for home loan after Chapter 13 Bankruptcy and after Chapter 7 Bankruptcy are different.

  • We will touch on qualifying for home loan after Chapter 7 Bankruptcy
  • But mainly, we will cover qualifying for home loan after Chapter 13 Bankruptcy
  • Many lenders do have mortgage lender overlays when it comes to home loan after Chapter 13 Bankruptcy
  • Overlays are additional mortgage lending guidelines that is implemented by individual lenders that are in addition to the minimum federal mortgage guidelines
  • Every mortgage loan programs, whether it is Conventional Loans, FHA Loans, VA Loans, USDA Loans, have their own set of federal minimum lending guidelines when it comes to qualifying for home loan after Chapter 13 Bankruptcy
  • We will mainly cover qualifying for home loan after Chapter 13 Bankruptcy with FHA Loans on this article since FHA Loans are by far the most popular mortgage program in the United States today

Chapter 13 Bankruptcy Versus Chapter 7 Bankruptcy

What is Chapter 13 Bankruptcy Versus Chapter 7 Bankruptcy

There are two types of bankruptcies.

  • A Chapter 7 Bankruptcy is called total liquidation which benefits for consumers who do not have any assets or are unemployed and/or underemployed
  • With a Chapter 7 Bankruptcy, a consumer can wipe out all of their debts and have a fresh financial start in life
  • There are certain debts that cannot be discharged in a Chapter 7 Bankruptcy such as government loans, tax liens, and child support
  • However, most debts and liabilities such as collection accounts and judgments can be fully discharged in a Chapter 7 Bankruptcy
  • Consumers who have a Chapter 7 Bankruptcy discharge can qualify for a home loan after 2 years from the discharge date of the Chapter 7 Bankruptcy
  • Lenders do not want to see any late payments and re-established credit after the Chapter 7 Bankruptcy discharged date

More On Chapter 13 Bankruptcy

Read More On Chapter 13 Bankruptcy

Chapter 13 Bankruptcy are for consumers who have income and assets:

  • Consumers need to restructure their debts and take time to pay them off
  • In order to qualify for a Chapter 13 Bankruptcy, petitioners need to have a job
  • Once filing Chapter 13 Bankruptcy and a Bankruptcy Trustee will be appointed to consumers by the United States Bankruptcy Courts
  • The Bankruptcy Trustee will go over petitioners finances and income and will take a percentage of monthly income
  • Use those proceeds to pay list of creditors
  • The Chapter 13 Bankruptcy re-payment plan will be anywhere between 3 to 5 years
  • Once consumers have made timely payments during Chapter 13 Bankruptcy plan and that period is over, the remaining debts owed to creditors are totally discharged
  • Can start a fresh financial start
  • There are certain requirements in qualifying for home loan after Chapter 13 Bankruptcy

Qualifying For FHA And VA Home Loan After Chapter 13 Bankruptcy

How Qualifying For FHA And VA Home Loan After Chapter 13 Bankruptcy

VA and FHA have the exact mortgage guidelines in qualifying for home loan after Chapter 13 Bankruptcy.

  • There are certain rules and mortgage regulations when qualifying for VA and FHA Home Loan After Chapter 13 Bankruptcy
  • Home buyers can qualify for a FHA and/or VA home loan after Chapter 13 Bankruptcy one year into the Chapter 13 Bankruptcy re-payment plan
  • Need approval of the Chapter 13 Bankruptcy Trustee
  • There is no waiting period to qualify for home loan after Chapter 13 Bankruptcy after the date of the Chapter 13 Bankruptcy discharged date
  • Unfortunately, all FHA and/or VA borrowers who just had a Chapter 13 Bankruptcy discharge with less than two years seasoning needs to be manual underwriting 
  • This means that a mortgage underwriter needs to manually underwrite the loan application

What Do Underwriters Look For When Manually Underwriting Home Loan After Chapter 13 Bankruptcy

What Do Underwriters Look For When Manually Underwriting Home Loan After Chapter 13 Bankruptcy

Mortgage loan applications where borrower had a Chapter 13 Bankruptcy discharged under 2 years will not get an Automated Approval per the Automated Underwriting System.

  • The Automated System will not render an approve/eligible but will render a refer/eligible which means the file needs to be manually underwritten
  • Unfortunately, not all lenders do manual underwriting
  • Many folks who just got their Chapter 13 Bankruptcy discharged are told that they do not qualify from banks and other lenders who do not do manual underwriting or they have overlays
  • Many lenders have their own waiting period after a Chapter 13 Bankruptcy discharge
  • Some lenders may require a two year waiting period after a Chapter 13 Bankruptcy discharge date
  • This is due to their lender overlays
  • I do not have any mortgage overlays for home buyers who need to qualify for home loan after Chapter 13 Bankruptcy
  • A large percentage of our business at Gustan Cho Associates are borrowers who just got a Chapter 13 Bankruptcy discharge and needs to qualify for a home loan

Timely Payments And Timely Payment History

What is Timely Payments And Timely Payment History

One of the most important factors mortgage underwriters look at on files with a recent Chapter 13 Bankruptcy discharge is if borrowers has made timely payments throughout the Chapter 13 Bankruptcy re-payment period:

  • Underwriters will want to see timely payments during borrowers payment plan
  • Mortgage underwriters will also want to see timely payments after discharged date of Chapter 13 Bankruptcy

Verification Of Rent And Payment Shock

What is Verification Of Rent And Payment Shock

Verification Of Rent is mandatory for all manual underwriting mortgage loan applications.

  • Verification Of Rent is only valid if the loan applicant can provide 12 months canceled check
  • Check needs to be paid to the landlord and/or by providing 12 months bank statements showing the rental payments being wired to the landlord’s bank account
  • The rental payments needs to be on time
  • No late payments with the past 12 months rental history is allowed
  • Home buyers who have been renting from a registered property management company can have the property manager complete a verification of rent form
  • VOR Form is provided by the lender
  • Completed VOR Form can be used in lieu of the 12 months canceled checks and/or 12 months of bank statements
  • Reason for the importance of verification of rent on manual underwrites is due to payment shock
  • Lenders want to know borrowers does not have payment shock
  • They go from renting an apartment to paying their new mortgage payment with no stress if they are used to making housing payment
  • For example, here is a case scenario:
    • if the renter is paying $1,000 per month in rent
    • their new mortgage payment is $1,100
    • then the payment shock is only $100
    • This is no problem for them to handle the new mortgage payment
    • However, if the renter is paying $1,000 for rent and their new mortgage payment is $3,000, then there is a large payment shock
    • the new mortgage payment is three times the amount of housing payment the mortgage loan borrower is accustomed to paying for housing expenses

Compensating Factors And Reserves

What are Compensating Factors And Reserves

Mortgage underwriters who are underwriting manual underwrites will look for compensating factors .

  • Compensating factors are positive factors that strengthen the mortgage loan applicant such as the following:
    • longevity on the job
    • additional income the borrower has but is not used to qualify for their loan such as
      • part time income
      • over time income
      • bonus income
      • larger down payment
      • reserves
      • Manual underwrites require one months of reserves
      • Reserves are one month of principal, interest, taxes, and insurance (also referred as P.I.T.I.)
      • Reserves cannot be gifted and needs to be borrower’s own funds

Home buyers who have filed Chapter 13 Bankruptcy and are at least one year into the Chapter 13 Bankruptcy or have recently had Chapter 13 Bankruptcy discharged and need a home loan after Chapter 13 Bankruptcy, please contact us at 262-716-8151 or text us for faster response. Borrowers can also email us at gcho@gustancho.com . We are available 7 days a week, evening, weekends, and holidays. We specialize in helping home buyers with prior bankruptcies, foreclosures, low credit scores, high debt to income ratios, and self employed borrowers.

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