How to Get an FHA Loan While in Active Chapter 13 Bankruptcy

For homeowners who have filed for Chapter 13 bankruptcy, the path to purchasing a new home or refinancing an existing mortgage may seem unclear However, FHA-insured mortgages provide a route for qualifying borrowers to obtain home financing while still making payments under an active Chapter 13 repayment plan

While securing an FHA loan amid ongoing bankruptcy involves extra requirements, it can be done if you meet the guidelines Let’s explore the key steps and tips for getting approved for an FHA mortgage while in active Chapter 13 bankruptcy

FHA Loan Eligibility During Active Chapter 13

The Federal Housing Administration sets specific criteria for approving borrowers who want an FHA loan while in active Chapter 13 bankruptcy

• You must be at least 12 months into your Chapter 13 repayment plan

• You need to obtain written permission from the bankruptcy court to take on the new mortgage debt

• You must not have any late payments on your bankruptcy repayment plan

• You need to meet all other FHA loan requirements unrelated to the bankruptcy

These requirements ensure you have demonstrated the ability to manage the new financial obligation of a mortgage payment along with your Chapter 13 plan.

Meeting standard FHA loan criteria — like minimum credit scores, debt-to-income ratios, and cash reserves — is also essential. The lender must be confident you can handle the additional debt despite ongoing bankruptcy.

The Process of Getting an FHA Loan in Chapter 13

Follow these key steps when pursuing an FHA-insured mortgage amid active Chapter 13 bankruptcy:

1. Review your finances – Make sure your income and expenses allow room in your budget for a mortgage payment. Calculate your debt-to-income ratio.

2. Consult your bankruptcy attorney – Discuss how a new mortgage could impact your Chapter 13 plan. Get their input on timing and feasibility.

3. File a motion with the bankruptcy court – Request permission from the judge to take on new mortgage debt. Supply details about the loan amount, property, etc.

4. Gather required documentation – Lenders will request bankruptcy paperwork, pay stubs, tax returns, bank statements, etc.

5. Find an FHA lender – Shop around with lenders familiar with financing during bankruptcy. Get pre-approved.

6. Make an offer on a home – Once pre-approved, start shopping for a property that meets FHA requirements.

7. Close on the mortgage – Finalize the loan, sign papers, and prepare to move into your new home.

Taking the proper steps and working closely with your attorney ensures the process goes smoothly without jeopardizing your Chapter 13 bankruptcy plan.

Tips for Approval on an FHA Loan in Active Chapter 13

Beyond meeting the base eligibility rules, here are some tips to boost your chances of successfully getting an FHA mortgage approved while in ongoing Chapter 13 bankruptcy:

• Highlight stable employment – Underwriters want to see reliable income, so emphasize your job security and tenure if applicable. Provide recent pay stubs.

• Make timely Chapter 13 payments – Don’t have any late bankruptcy plan payments. This demonstrates you can manage debt responsibly.

• Explain any derogatory credit events – If you have late payments or collections accounts, write letters explaining the circumstances behind them.

• Build your post-bankruptcy credit – Having new positive lines of credit — like an auto loan or credit card — helps offset the bankruptcy.

• Save for a larger down payment – Putting 10-15% down shows financial commitment and can ease approval.

• Work with a mortgage broker – Brokers have relationships with bankruptcy-friendly lenders and can help you find the right fit.

• Apply with multiple lenders – If denied, keep trying other lenders. Each has their own approval tolerances.

• Consider loan alternatives if needed – FHA loans are ideal, but also look into VA, USDA options based on your situation.

With proper preparation and persistence, an FHA loan approval while in active Chapter 13 bankruptcy is achievable.

Alternatives if an FHA Loan is Not Feasible

If you don’t qualify for an FHA loan amid ongoing Chapter 13 for some reason, two other government-backed mortgages may be possibilities:

VA Loans – For qualifying Veterans and military members, VA loans only require 12 months of Chapter 13 payments like FHA. No down payment is needed.

USDA Loans – For low-to-moderate income borrowers in rural areas, USDA loans are also available after 12 months of on-time Chapter 13 payments.

In some circumstances, you may be able to qualify for a government-backed mortgage easier than an FHA loan while in active bankruptcy.

Certain portfolio lenders also offer non-qualified mortgages with flexible approval guidelines. However, interest rates and fees are usually much higher on these non-conforming loans. Still, they provide another option if you’re struggling to get approved but need to purchase urgently.

Waiting Until After Chapter 13 Discharge

Some borrowers may want to wait until after their Chapter 13 discharge to pursue a mortgage, rather than taking on new debt amid active bankruptcy. Here are some advantages to waiting:

• Better loan terms – Lenders view discharged Chapter 13 more favorably. You may get lower rates.

• No court approval needed – The loan process is simpler without the court permission requirement.

• Stronger credit profile – Time helps improve your credit through consistent payments and mix of credit types.

• Underwriting ease – Manual underwriting may be avoided two years after Chapter 13 discharge.

On the other hand, delaying a home purchase can limit choices and inventory. Market conditions may also be less favorable later on.

Weigh your unique situation, finances, and homebuying goals to determine the ideal timeline for obtaining a mortgage after Chapter 13.

Know Your Options

The bottom line is that an FHA loan is feasible during active Chapter 13 bankruptcy, provided you meet the 12-month payment timeline and get court approval. This path makes homeownership accessible for qualified borrowers who need more flexible financing options amid bankruptcy.

That said, an FHA loan while in Chapter 13 is not the only option. VA, USDA, and portfolio loans offer additional choices if you don’t qualify for FHA. And waiting until completing Chapter 13 before buying a home may make sense in some circumstances as well.

Discuss your specific bankruptcy situation with both a mortgage professional and your attorney to determine the most strategic approach. With persistence and the right guidance, purchasing or refinancing a home amid ongoing Chapter 13 is very achievable. Don’t assume bankruptcy will permanently disqualify you from obtaining a mortgage.

Frequently Asked Questions About FHA Loans in Chapter 13

How long do I have to wait to get an FHA loan after Chapter 13 discharge?

If you successfully complete Chapter 13 and receive a discharge, there is no required waiting period to apply for an FHA loan after bankruptcy. However, manual underwriting is required until two years after discharge.

What credit score is needed for an FHA loan in Chapter 13?

The minimum credit score for an FHA loan is 500-579 with a 10% down payment, or 580 with a 3.5% down payment. During bankruptcy, underwriters mainly look for on-time Chapter 13 payments.

Can I remove PMI on an FHA loan after Chapter 13 bankruptcy?

Yes, you can request to remove FHA mortgage insurance once you reach 22% equity in the home and meet seasoning requirements. Bankruptcy does not impact FHA PMI cancellation rules.

Do all late payments drop off my credit report after Chapter 13 discharge?

No, only accounts included in the Chapter 13 bankruptcy will be removed from your credit report after successful completion and discharge. Any late payments or collections from debts not part of the bankruptcy will remain.

Can I get an FHA cash-out refinance while in active Chapter 13?

No, FHA cash-out refinancing requires a borrower to be two years past discharge date. Other FHA refinances like streamline or rate-and-term may be possible while still making Chapter 13 payments.

The key takeaway is that FHA mortgages provide a viable home financing option amid ongoing Chapter 13 bankruptcy repayment, if you meet the base requirements. Be sure to explore all your options and get trusted guidance for your unique situation.