Are you a Chapter 13 bankruptcy? Do you currently own a property with equity? OR – do you rent and wish to buy before your mortgage rates rise? If this is the case, there may be good news for you. Homeowners or renters under present FHA and VA programs might have access to home loan financing if they meet certain requirements. For over a decade, I’ve been assisting borrowers through this difficult situation.

There may be alternatives available to those homebuyers who want to refinance their existing mortgage in order to obtain better terms. Many individuals are looking to discharge their Chapter 13 debt completely and receive an early discharge by refinancing it with a cash-out refinance. You might be able to use your equity to pay off your mortgage debt as well as accrued interest if you have enough of it. There could also be a program available for current renters who want to buy a home and start building equity.

There are two types of consumer bankruptcies that are very common in the U.S.  Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Borrowers can qualify for a mortgage after the Chapter 7 Bankruptcy discharged date after meeting waiting period requirements. Waiting period requirements after the discharge date to qualify for a mortgage depending on the type of mortgage program.

Capital Lending Network, Inc. offers non-QM mortgage one day out of bankruptcy where there is no waiting period requirements with a 30% down payment. There is no waiting period after the Chapter 13 Bankruptcy discharge date to qualify for FHA and/or VA loans. However, can you qualify for a mortgage during the Chapter 13 Bankruptcy repayment period without being discharged?

FHA And VA Loans During Chapter 13 Bankruptcy

FHA and VA loans are the only two loan mortgage programs that allow people to qualify for a loan during the Chapter 13 Bankruptcy repayment plan. Fannie Mae and Freddie Mac do not allow borrowers to qualify for conventional loans during the Chapter 13 Bankruptcy repayment plan. Borrowers can qualify for an FHA and/or VA loan during the Chapter 13 Bankruptcy repayment plan.

Check If You Qualify

You need to be in the repayment plan for 12 months and provide proof you have made 12 timely payments to creditors. Chapter 13 Bankruptcy does not need to be discharged. Trustee approval is required. Most trustees will approve a home purchase and/or refinance during the Chapter 13 Bankruptcy repayment plan. Most Chapter 13 repayment periods is for 60-month terms.

How To Do a Cash-Out Refinance While In Chapter 13 Bankruptcy

Most Chapter 13 Bankruptcy repayment terms is normally set for 60 months. 60 months is five years. Renters who are in Chapter 13 Bankruptcy can lose the opportunity of becoming homeowners if they do not take advantage of the hot housing market. Home prices are skyrocketing nationwide. This is mainly due to historic low mortgage rates. Now, FHA and VA allow borrowers to qualify for a mortgage while in Chapter 13 Bankruptcy repayment.

However, borrowers need to be in the repayment plan for at least 12 months. Both FHA and VA have similar mortgage program guidelines and requirements when it comes to getting approved for a mortgage while in Chapter 13 Bankruptcy. HUD, the parent of FHA, requires a 580 credit score to qualify for a 3.5% home purchase FHA loan. Borrowers need to meet all HUD Agency Guidelines.

HUD Guidelines On FHA Loans With Credit Scores Down To 500 FICO

Borrowers with credit scores under 580 FICO and down to 500 credit scores are eligible to qualify for FHA loans. However, borrowers with under 580 credit scores and down to 500 FICO need to put a 10% versus a 3.5% down payment. The file needs to be a manual underwrite. FHA Manual Underwriting Guidelines apply. Debt-to-income ratio restrictions apply on manual underwriting on both FHA and VA loans.

Borrowers with higher debt-to-income ratios need to have compensating factors. VA loans do not have a maximum debt-to-income ratio cap if they can get approve/eligible per the automated underwriting system. However, VA loans will have DTI caps on manual underwriting. Both FHA and VA loan manual underwriting guidelines are the same.

FHA And VA Manual Underwriting Guidelines

Manual underwriting means a human mortgage underwriter is assigned to the file. The difference between manual versus automated underwriting systems is with manual underwriting, a mortgage underwriter will carefully manually underwrite the file. Debt-to-income ratios will be determined by the number of compensating factors the borrower has.

Here are the manual underwriting guidelines on debt to income ratio versus the number of compensating factors:

• For borrowers with no compensating factors, the recommended front-end debt to income ratio is 31% and back end debt to income ratio is 43%
• For borrowers with one compensating factor, the recommended front-end debt to income ratio is capped at 37% and back end debt to income ratio is 47%
• Borrowers with two compensating factors, the recommended front-end debt to income ratio are capped at 40% and back end debt to income ratio is capped at 50%

Compensating factors are positive factors mortgage underwriters consider as putting less risk on the borrower.

 Compensating Factors In Manual Underwriting When Doing Cash-out Refinance

Manual underwriting is considered riskier files than automated underwriting system-approved files. Mortgage underwriters have a lot of discretion in manual underwriting. Mortgage underwriters can exceed the above maximum debt-to-income ratio caps in manual underwriting if the underwriter feels the borrower has strong compensating factors.

The following are examples of compensating factors:

• Part-time and/or other income the borrower had for at least 12 months but not yet two years and was not used as qualifying income
• All manual underwriting requires borrowers one month’s reserves (One month of principal, interest, taxes, and insurance)
• Three months of reserves are considered a strong compensating factor
• Large down payment
• The borrower has a habit of saving money over the years
• A low payment shock of 5% or less from rental payments to the new mortgage payment is considered a strong compensating factor
• Non-borrowing spouse with a full-time job
• The borrower has longevity in their job with consistent pay raises and promotions as well as furthering their careers with advanced education and/or certifications

Mortgage underwriters can allow debt-to-income ratio caps to surpass 50% DTI if the borrowers have multiple strong compensating factors.

How To Refinance Mortgage While In Chapter 13 Bankruptcy

Homeowners in Chapter 13 Bankruptcy repayment are eligible to refinance their current home mortgage. Rate and term refinance will save homeowners to save money with lower mortgage rates and lower monthly payments. Both FHA and VA refinance mortgage guidelines while in Chapter 13 Bankruptcy is the same. Trustee approval is required. Cash-out refinance is allowed for homeowners with equity in their homes. Many people with substantial equity in their homes can do a cash-out refinance. They can pay off the Chapter 13 debts and complete Chapter 13 earlier than the end of the term.

Refinancing Process After Bankruptcy Chapter 13  

1. To be above 580, you’ll need two of three credit scores to be excellent or good. (Note: Due to COVID-19, you will now need a 600 FICO to qualify. As this may change in the future, contact us to create a road map for your qualification.)
2. In the last 24 months, there can’t be more than one 30-day late payment on any account on your credit report. We will also need to confirm that rent/mortgage payments have been on time for the same 24 months.
3. Provided the trustee payment history beginning with the launch of the plan. There must have been at least 12 months of on-time payments, regardless of length in repayment, and all reimbursements must have been on time to the trustee.
4. There must be one month’s worth of “post-closing reserves” or in common parlance – one month’s worth of your new housing payment after your loan has closed
5. After all of this, the transaction still must be authorized by the trustee or court. We can send you the estimated terms of your new transaction after we’ve confirmed that you’re pre-qualified for a loan. Every case is unique; I’ve seen trustees approve things in a week and courts take three months. You should contact your lawyer to obtain turnaround times in your area.

It may appear to be a daunting task. It isn’t really; it’s just a process that we take one step at a time. If you’re 12 months or more into Chapter 13 bankruptcy and live in the United States, there is hope for you to purchase or refinance a home. Please feel free to contact me with any particular inquiries, and I’ll be delighted to go through your situation in depth. I’m hoping this can provide some encouragement regarding house loans while you’re going through Chapter 13 bankruptcy.

Qualifying For An FHA And VA Loan After Chapter 13 Bankruptcy Discharged Date

There are no waiting period requirements after the Chapter 13 Bankruptcy discharge date to qualify for an FHA and/or VA loan. However, if Chapter 13 Bankruptcy discharge has not been seasoned for at least two years, the file needs to be manually underwritten. Capital Lending Network, Inc. are experts on FHA and VA loans after the Chapter 13 Bankruptcy discharge date. To qualify with a national mortgage lender with no lender overlays on government and conventional loans, contact us at Capital Lending Network, Inc. at 888-900-1020 or email us at contact@capitalendingnetwork.com.