This ARTICLE On HUD Chapter 13 Guidelines And Requirements On FHA Home Loans Was PUBLISHED On November 4th, 2019
Many mortgage borrowers have been told they cannot qualify for FHA Loans during Chapter 13 Bankruptcy repayment plan.
- Many have been told they need to wait 2 years after Chapter 13 discharge date
- This is not correct
- Per HUD Chapter 13 Guidelines, borrowers can qualify for both purchase and refinance FHA mortgages during Chapter 13 Bankruptcy repayment plan without being discharged
- The bankruptcy trustee needs to approve the transaction
- Most trustees will approve a home purchase and/or refinance transaction during the Chapter 13 Repayment plan
- They why do lenders refuse to accept borrowers during Chapter 13 repayment plan?
- Why do lenders turn away borrowers after Chapter 13 discharge?
- The answer is due to lender overlays
- We will discuss what lender overlays are versus HUD Chapter 13 Guidelines on FHA Loans in this article
In this article, we will cover and discuss HUD Chapter 13 Guidelines And Requirements On FHA Home Loans.
Lender Overlays Versus HUD Chapter 13 Guidelines
What are lender overlays?
- Lender overlays are additional mortgage guidelines that are above and beyond the minimum HUD Agency Guidelines on FHA Loans
- All mortgage lenders need to be HUD Approved
- All HUD Approved Lenders need to meet the minimum FHA Guidelines
- However, lenders can have higher lending requirements that are beyond the minimum HUD Guidelines
- Mortgage companies can impose lender overlays on basically anything
In the next paragraph, we will discuss examples of lender overlays versus FHA Lending Guidelines.
Typical Overlays Imposed By Mortgage Companies
Here are typical Lender Overlays versus HUD Agency Guidelines:
HUD requires a minimum 580 FICO for a 3.5% down payment FHA loans:
- Most lenders require a 620 FICO or higher even though HUD only requires 580
FHA does not require borrowers to pay outstanding collections and charged-off accounts:
- Mortgage companies can require borrowers to pay outstanding derogatory tradelines
HUD allows up to 46.9% front end and 56.9% back end debt to income ratio to get an approve/eligible per automated underwriting system (AUS):
- Most mortgage companies will cap debt to income ratios at 45% to 50% DTI as part of their overlays
HUD allows borrowers to qualify for FHA loans during Chapter 13 repayment with Trustee Approval and no waiting period after Chapter 13 discharged date:
- Most lenders do not allow borrowers during Chapter 13 repayment to qualify unless the borrower has their bankruptcy discharged and seasoned for two years
- There is no waiting period after Chapter 13 discharged date but lenders may require a one to a two-year waiting period after the discharged date
The minimum credit score to qualify for FHA Loans is 500 FICO with 10% down payment:
- Most lenders will not allow borrowers with 580 credit scores
There are countless of lender overlays mortgage companies can impose. Gustan Cho Associates are one of the very few national lenders who has no overlays on government and conventional loans.
HUD Manual Underwriting Guidelines
Manual Underwriting is only allowed with FHA and VA Loans.
- Not all lenders entertain manual underwriting
- A large percentage of our borrowers at Gustan Cho Associates are manual underwrites
- All FHA loans during Chapter 13 Bankruptcy repayment plan are manual underwriting
- Anyone who has Chapter 13 discharged but the discharged date is less than 2 years, the file needs to be a manual underwrite
- A large percentage of our borrowers at Gustan Cho Associates are manual underwriting
We are experts in originating FHA and VA manual underwriting files.
HUD Chapter 13 Guidelines And Requirements
Below are the HUD Chapter 13 Guidelines And Requirements on FHA loans:
- Borrowers during Chapter 13 repayment plan needs to have made 12 timely payments to the Bankruptcy Courts in order to qualify
- The bankruptcy does not have to discharged
- Trustee approval required
- Needs to be manual underwrite
- Most trustees will allow and sign off on a home purchase and/or refinance during Chapter 13 repayment
- There is no waiting period after Chapter 13 discharged date
- Any Chapter 13 without a two-year seasoning needs to be manually underwritten
- Verification of rent is required on manual underwrites
- Gustan Cho Associates will exempt borrowers without verification of rent to qualify for manual underwriting if they are living with family rent-free
- Debt to income ratios depends on compensating factors
In the next paragraph, we will cover and discuss the importance of compensating factors for manual underwriting borrowers with high debt to income ratios.
The Importance Of Compensating Factors On Manual Underwriting
Here are the debt to income ratio requirements on manual underwriting files:
- The maximum DTI with no compensating factors is 31% front end and 43% back end
- Debt to income ratios is 37% front end and 47% back end with two compensating factors
- DTI is capped at 40% front end and 50% back end with two compensating factors
Examples Of Compensating Factors
Below are examples of compensating factors:
- Low payment shock of 5% or less from renting to new housing payment
- History of savings by borrowers
- Three or more months in reserves
- The borrower has a second job that has been seasoned for at least 12 or more months that is not used as qualified income
- Putting more down payment on home purchase than the minimum required
With additional compensating factors, mortgage underwriters can go beyond 50% debt to income ratios on manual underwrites.