Last Updated on February 15, 2023 by Eric Jeanette
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.
You can apply for a mortgage to purchase a home during or after a chapter 13 bankruptcy without having to wait two years.
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.
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.
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*This chart shows the wait time to apply for a mortgage 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 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.
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.
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. Therefore, we will help you to find the lender who can work 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.
Read: [FHA Loan Requirements]