Mortgage After Chapter 13 Bankruptcy Discharge

Home buyers with a recent chapter 13 bankruptcy may have difficulty getting approved for a traditional mortgage. Most lenders will require you to wait up to two years depending upon the type of mortgage you need. However, the FHA guidelines may allow for you to qualify while still making chapter 13 bankruptcy payments.

FHA loans allow borrowers to apply during Chapter 13 after 12 months of on-time payments and court approval, and impose no mandatory waiting period after discharge.

FHA guidelines will allow you to apply for a mortgage to purchase a home during or after a chapter 13 bankruptcy without having to wait two years.

We help many home buyers each month to qualify for an FHA loan after just one year of making chapter 13 bankruptcy payments. Our experienced loan officers will help walk you through the process so you do not have to wait until the bankruptcy seasoning period as ended.

What is a Chapter 13 Bankruptcy?

A chapter 13 bankruptcy is where the individuals will honor the balance of their debt by making agreed upon monthly payments over the course of three to five years. This is a way to honor the debt that is owed while making comfortable monthly payments.

The payments are typically garnished out of the paycheck to the trustee who from there will disburse the appropriate amount each month to the creditors. The garnishment of wages is why a Chapter 13 bankruptcy is sometimes called the “wage earner’s plan”.

When individuals choose to repay their debts through a chapter 13 bankruptcy, it signals to lenders that the person may be ready for the responsibility of having and paying for a mortgage.

Mortgage After a Chapter 13 Bankruptcy Discharge

When applying for a mortgage after a chapter 13 bankruptcy discharge, most mortgage programs require a specific waiting period before you are able to apply. The waiting period is anywhere from 1-2 years depending upon the type of mortgage as indicated in the chart below.

There are two mortgage programs where you can forgo the waiting period. The first is an FHA loan and the other is a subprime loan.

A subprime loan will likely require a larger down payment of at least 15-25% or more depending upon your credit score.  You can qualify as a W2 wage earner or as someone who is self employed who cannot document is or her income. However, the terms for this type of loan are not optimal and the larger down payment is not something the average home buyer can come up with.

FHA loans are the perfect solution for people who have a recent Chapter 13 discharge. With just a small down payment of 3.5%, you should be able to purchase a home or refinance if you already own a home. Another benefit of an FHA loan is the interest rates are competitive and you can qualify with lower credit scores.

Type of Loan	Typical Wait Time
Conventional	2 years after discharge
FHA	After 12 Bankruptcy Payments
VA	1 Year after discharge
USDA	1 Year after discharge
Subprime	1 Day after discharge

*This chart shows the wait time to apply for a mortgage before and after a Chapter 13 bankruptcy discharge

Mortgage Before a Chapter 13 Bankruptcy Discharge

You can apply for an FHA loan before your chapter 13 bankruptcy has discharged. The key is to find a lender who is willing to begin the process before the usual waiting period of 1 year after the Ch13 discharge date. While most lenders will make you wait, we can help you right now.

While most lenders will not allow you to apply for an FHA loan yet, the few lenders who do will require you to have made at least 12 on time bankruptcy payments first.

In addition to the 12 on time bankruptcy payments, you will also need to have established a positive credit history and will need approval from the bankruptcy trustee to get a mortgage.

Cited from HUD’s handbook these are the requirements that must be met to apply for an FHA loan before or after a Chapter 13 bankruptcy:

• At least 12 months of on-time payments for active Chapter 13.

• Court/trustee written approval required if Chapter 13 isn’t discharged.

• After discharge, no official waiting period exists per FHA—but manual underwriting is required if <2 years post-discharge.

Mortgage after a Chapter 13 Bankruptcy Dismissal

If your Chapter 13 bankruptcy has been dismissed, it means you were unable to follow the payment plan or you violated one of the other requirements or your chapter 13 bankruptcy. This is not viewed as a positive thing when applying for a new mortgage.

In most instances, the waiting period to apply for a mortgage after a Ch 13 dismissal will be the same as a Ch 7 bankruptcy. There are those who file for Chapter 7 soon after the Chapter 13 dismissal. If this happens, you would need to wait until 2 years after your dismissal to apply for a mortgage. However, there are occassions where you can get approved with a dismissal. One of those instances is if your payment plan was dismissed because you paid the entire owed balance in full.

How to Qualify for a Mortgage after a Chapter 13 Bankruptcy

The minimum requirements to qualify for a mortgage after a Chapter 13 bankruptcy are as follows:

• Two year full time work history
• Minimum credit score of 580 (3.5% down payment) or 500 (10% down payment)
• Maximum debt to income ratio of 56%
• The home must be your primary residence
• You must be able to fully document your income using pay stubs and tax returns

One of the lenders in our FHA Lenders network will help you to get an FHA pre-approval so you can buy a home.

Which Lenders Can Finance a Home After a Chapter 13 Discharge?

All lenders who offer FHA loans can finance your home after a chapter 13 discharge. However, most lenders will not offer an exception to the normal waiting period.

Most national banks are likely not going to allow this waiting period exception. They have what is called “lender overlays” which is an industry term that means they are imposing tighter rules than what the FHA guidelines permit. This may be why you could have been denied by another lender.

We do not have lender overlays and will work within all of the FHA guidelines as written.  Therefore, we will help you to qualify with your recent Chapter 13 bankruptcy. Simply complete this short quote form.

What is a bankruptcy trustee?

The bankruptcy trustee is responsible for making sure you are adhering to the bankruptcy payment plan. He or she also makes sure the creditors are paid according to the plan each month every time your payment is taken out of your pay check. It is this bankruptcy trustee who ultimately decides whether you are ready for a new mortgage and issues that approval.

Exceptions for Extenuating Circumstances

Exceptions may reduce waiting periods if significant hardship can be documented. Here are some examples of circumstances which potentially could result in an exception to the FHA chapter 13 bankruptcy waiting period.

• Serious illness which resulted in a loss of income
• Death in the family that directly resulted in default of debt payment
• Military service

These are just a few examples of factors that can be presented to an underwriter when requesting an exception to the Ch 13 bankruptcy waiting period. There is no requirement that a lender grant an exception. The decision is entirely up to the lender and they will be looking for compensating factors when making a final decision.

Frequently Asked Questions

Q: How long do I have to wait before applying for a mortgage during Chapter 13?
A:  Most lenders require at least 12 to 24 months of on-time bankruptcy payments before considering you.

Q: What type of mortgage can I qualify for while in Chapter 13?
A: FHA and VA loans are the most common options available during or shortly after Chapter 13

Q: Do I need permission from the bankruptcy court to get a mortgage?
A: Yes, you will need written approval from the bankruptcy trustee and the court.

Q: Will my credit score stop me from getting approved?
A: A low score doesn’t automatically disqualify you, especially with FHA loans, but a higher score improves your chances and terms.

Q: Can I refinance my current mortgage during Chapter 13?
A: Possibly. Many homeowners use FHA Streamline or VA IRRRL options with trustee approval.

Q: Do I need to be discharged from Chapter 13 before applying?
A: Not necessarily. Some lenders allow you to apply after 12 months of on-time payments, even if you’re not yet discharged.

Q: Will the bankruptcy appear on my credit report?
A: Yes, Chapter 13 will remain for 7 years, but lenders look closely at recent credit behavior and your payment history. If your bankruotcy is not on your credit report, we will find it when ordering a CAIVRS search.

Q: How much down payment is needed while in Chapter 13?
A; We are required to follow the standard FHA guidelines of 3.5% for credit scores of 580+, and 10% down for credit scores of 500-579.

Q: What documentation will I need to apply for a mortgage during bankruptcy?
A: You should expect to provide: the following:

• Trustee approval

• Payment history

• Credit report (lender will pull)

• Bankruptcy paperwork

• Current mortgage statement if you are refinancing

Read: [How to Qualify for an FHA Loan After a Bankruptcy]

Read: [FHA Loan Requirements]