HUD Chapter 13 Guidelines With Late Payments On FHA Mortgages

This ARTICLE On HUD Chapter 13 Guidelines With Late Payments On FHA Mortgages Was PUBLISHED On March 2nd, 2020

HUD Chapter 13 Guidelines With Late Payments On FHA Mortgages And Qualifying for an FHA mortgage during a chapter 13 bankruptcy with late payments:

  • Gustan Cho Associates are mortgage experts when it comes to guidelines surrounding bankruptcies
  • We offer all Conventional, FHA, and VA mortgage is without LENDER OVERLAYS
  • We are able to help clients who are currently in an active chapter 13 bankruptcy or less than two years discharged from a chapter 13 bankruptcy
  • In this blog, we will detail how to qualify for an FHA mortgage with a chapter 13 bankruptcy
  • This holds true even if you have some late payments in the past

In this article, we will discuss and cover HUD Chapter 13 Guidelines With Late Payments On FHA Mortgages.

HUD Chapter 13 Guidelines With Late Payments And Manual Underwriting

What are the guidelines with late repayment of FHA mortgages in HUD Chapter 13

In order to qualify for an FHA mortgage with an active chapter 13 bankruptcy, you must pass FHA manual underwriting requirements.

  • Even if your chapter 13 bankruptcy is discharged, you will require a manual underwrite unless your discharge is over two years old
  • The term “manual underwriting” scared many clients, but there is nothing to be scared of
  • We complete hundreds of manually underwritten FHA loans every single year
  • We are the experts in this area. Lately, we have come across a few unique situations surrounding late payments

We will now detail a few basic qualifications for FHA manual underwriting.

Loan To Value Mortgage Guidelines

Loan to Value Requirements:

  • 500 – 579 – 10% down payment (or more)
  • 580 and above – 3.5% down payment (or more)

Credit Score and MAX Debt-To-Income Requirements:

  • No credit score – DTI cannot be higher than 31%/43%
  • 500 – 579 – DTI cannot be higher than 31%/43%
  • 580 and above – DTI cannot be higher than 31%/43% with ZERO compensating factors
  • 580 and above – DTI cannot be higher than 37%/47% with ONE compensating factors
  • 580 and above – DTI cannot be higher than 40%/40% with ZERO discretionary debts
  • 580 and above – DTI cannot be higher than 40%/50% with TWO compensating factors

HUD Chapter 13 Guidelines With Late Payments And The Importance Of Compensating Factors

What are compensating factors:

  • Verified cash reserves (3 months of PITIA for 1-2 unit homes and 6 months PITIA for 3-4 unit homes)
  • Minimal increase in housing payment
  • Significant additional income not used for qualifying income
  • Pass FHA residual calculations

For more information on the debt to income requirements or compensating factor information, please call or text Mike Gracz on 630-659-7644 or shoot an email to [email protected].

HUD Guidelines On Reserves

Reserve Requirements (not to be confused with compensation factors)

  • 1-2 unit homes – 1-month PITIA
  • 3-4 unit homes – 3-months PITIA 

HUD Chapter 13 Guidelines With Late Payments And The Importance Of Credit History And The Ability To Repay

What are the guidelines for late payment and the importance of credit history and HUD repayment options Chapter 13

Credit History Requirements:

Credit history is the nuts and bolts of manual underwriting. Besides your credit score, your credit history will play a major factor in your qualifications.

Housing and Installment debt:

  • You must have a clean 12 months of payment history on all housing and installment debts
  • You are allowed two 30-day late payments in the previous 24 months, assuming those late payments are more than 12 months old (so between months 13 and 24)
  • An installment debt is a financial obligation like an auto-payment where your payment is the same every month

If you do not have a mortgage reporting on your credit report, we will complete a VERIFICATION OF RENT to make sure you have on-time housing payments.

HUD Manual Underwriting Guidelines On Revolving Accounts And Collections

The FHA manual underwriting guidelines are a little more lenient on revolving accounts.

  • You may not have any major derogatory missed payments on your credit report
  • FHA defines major derogatory as any payment over 90 days late OR three 60 day late payments
  • Any non-medical collections in the past 12 months are considered major derogatory credit

Meaning you can have a late payment or two on a credit card in the past 12 months and still may qualify for the FHA loan.

Derogatory Credit Tradelines

Derogatory credit items will require a strong letter of explanation and sometimes supporting documentation to qualify.  if you have collections totaling over $1,000, 5% of the total balance due will be added as a monthly payment against your overall debt to income ratio.

This is an FHA requirement.

  • Just because you are in a chapter 13 bankruptcy, does not mean your financial life becomes easier
  • Typically, you are paying your creditors back less than the total amount you owe
  • However, you still have a significant payment to make the trustee every month, along with your everyday bills and expenses
  • It is possible to miss a payment to the trustee and fall behind on your bankruptcy
  • If you fall behind far enough, the trustee will “dismiss” your bankruptcy and you will not be eligible for a discharge
  • If this is the case, the creditors can come back after you as you did not fill your repayment agreement with the trustee

If you miss a payment and are able to catch right back up, you still may qualify for an FHA mortgage.

HUD Chapter 13 Guidelines With Late Payments During Repayment Plan

Late payments during a chapter 13 repayment plan.

Late payments to the trustee:

  • Late payments are never a positive thing when it comes to mortgage qualifications, but they may not disqualify you from getting a mortgage
  • In the past, we have been able to close mortgages with late payments to the trustee during a chapter 13 bankruptcy
  • This is heavily frowned upon but still possible
  • We have closed a borrower’s loan who was 60 days late to the trustee at the beginning of the Chapter 13 repayment plan
  • The trustee was able to get our borrower caught up on payments and extended her chapter 13 plan two months
  • The underwriter was able to approve the loan
  • This is because she had a clean 12 months of payment history after that 60-day late payment
  • In this case, after her 60-day late payment, she had made 26 on-time payments to the trustee before applying for the FHA loan
  • During the underwriting process, she needed to have a strong letter of explanation for the reasons for being late, explain how she recovered from the late payments and explained while it will not happen again

That letter of explanation along with the 26 recent on-time payments to the trustee, no other derogatory marks on her credit report, and two months of reserves allowed the underwriter to approve this mortgage.

HUD Chapter 13 Guidelines With Late Payments To Other Creditors Outside the Plan

What are the guidelines for manual underwriting in HUD regarding late payment

Late payments to other creditors during a chapter 13 bankruptcy:

  • This can be a little bit harder to get around
  • We have clients who have opened up new credit during an active chapter 13 bankruptcy
  • This is a great way to raise your credit score during your repayment plan
  • This particular client opened six accounts in total, and two of those accounts went to collections
  • As an underwriter, seeing six new liabilities and 33% of those going to collections is not a good sign
  • This particular borrower was able to document a short-term disability stint while the late payments occurred
  • The borrower broke part of his hand and was unable to work for two months
  • These minor credit cards did slip all the way into collection status

Since the collection was over 12 months old, the borrower had medical documentation. The borrower will also need a strong letter of explanation. The underwriter was able to justify the derogatory collection accounts during an active chapter 13 bankruptcy.

HUD Manual Underwriting Guidelines On Late Payments

FHA manual underwriting does have specific requirements that must be met, and then some ambiguous items that are underwriter discretion.

  • When an item is underwriter discretion, such as a late payment during a chapter 13 bankruptcy, the more supporting documentation you can provide the better
  • The main reasons underwriters will allow the late payments are documented illnesses with medical documentation
  • Such as documentation showing you were physically in the hospital and unable to pay your bills
  • Or if there is a death of a wage earner in your family
  • Besides something catastrophic like the instances above, getting around late payments can be very difficult

Gustan Cho Associates have seen every credit profile from high 400s all the way up to mid 800s. When in an active chapter 13 bankruptcy, your credit scores usually hover right around 580 to 600. This is a great threshold for manual underwriting. We strive to offer the best customer service possible and our loan officers are up to date on the changing mortgage guidelines. Many loan officers are not educated with manually underwritten mortgage loans. Please subscribe to our YouTube CHANNEL to stay up to date with mortgage news!

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