Filing for Chapter 13 bankruptcy can be a challenging situation, but it does not have to derail your dreams of homeownership. The United States Department of Agriculture (USDA) offers special 100% financing loans to help low-to-moderate income borrowers in rural areas purchase a home. If you are currently in a Chapter 13 repayment plan, you may be wondering – can I get a USDA loan while in Chapter 13 bankruptcy?
The short answer is yes, you can qualify for a USDA loan if you meet specific requirements. While it may take additional effort, USDA home loans provide a path to homeownership even if you filed for Chapter 13 bankruptcy.
Overview of Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows debtors to reorganize their finances through a court-supervised repayment plan, rather than liquidating assets like Chapter 7 bankruptcy The repayment plan timeline generally lasts three to five years
Below are some key features of Chapter 13 bankruptcy
- Develop a repayment plan to pay back creditors over three to five years.
- Make monthly payments to a bankruptcy trustee who distributes funds to creditors.
- Discharge remaining debts after completing repayment plan.
- Retain non-exempt assets like home and vehicles.
- Stop wage garnishments, repossessions, foreclosures and utility shut-offs.
- Catch up on missed mortgage payments through the repayment plan.
Chapter 13 bankruptcy stays on your credit report for seven years from the filing date. However, its impact on your credit score diminishes over time as you make consistent on-time payments.
USDA Loan Requirements for Chapter 13 Bankruptcy
The USDA Single Family Housing Guaranteed Loan Program offers 100% financing loans to low-to-moderate income buyers in rural locations to help increase homeowners in these areas.
To qualify for a USDA loan if you have an open Chapter 13 bankruptcy case, you must meet the following eligibility criteria:
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Made 12 Months of Timely Chapter 13 Payments – You must be in your Chapter 13 repayment plan for at least 12 months and have made all required trustee payments on time. This demonstrates you can manage your finances responsibly.
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Written Permission from Bankruptcy Trustee – Your bankruptcy trustee must provide written consent authorizing you to take on additional mortgage debt through a USDA home loan.
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Meet Income and Location Requirements – In addition to the Chapter 13 provisions, you must meet general USDA loan eligibility standards including income thresholds based on your area and purchasing a home in an eligible rural location.
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Favorable Credit History Outside of Bankruptcy – Having strong credit accounts that you’ve paid on time before and after your Chapter 13 filing helps improve your chances of approval.
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Stable Income – Lenders want to see reliable income from employment or other sources to ensure you can manage the home loan after your repayment plan ends.
The USDA Loan Process During Chapter 13
If you meet the requirements above, here is an overview of the process to get a USDA home loan while in an active Chapter 13 bankruptcy:
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Request permission from your bankruptcy trustee to take on new mortgage debt. They will review your repayment plan to date to make the determination.
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Find a USDA approved lender and apply for pre-qualification. The lender will review your credit, income, debts and assets.
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Provide Chapter 13 documentation – repayment plan, trustee approval letter, recent statements showing on-time payments.
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Submit required paperwork to underwriting. Be transparent about your situation to improve chances of approval.
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Get appraisal and inspection completed on your chosen property. Make sure it meets USDA location and eligibility guidelines.
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Receive clear-to-close after the underwriting process is complete.
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Attend closing and take possession of your new home! Continue Chapter 13 plan.
The process may take longer compared to borrowers who have not filed for bankruptcy. But if you meet the requirements and submit all paperwork promptly, you could get the keys to your new home even while repaying debts through Chapter 13.
Tips for Successfully Getting USDA Financing
Here are some tips to improve your chances of getting approved for a USDA home loan if you filed Chapter 13 bankruptcy:
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Make all trustee payments on time without lapses or extensions. Delayed payments reduce likelihood of approval.
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Keep accounts current and pay non-Chapter 13 debt obligations when due to show fiscal discipline.
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Maintain steady employment and income sources throughout the process.
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Limit taking on new credit during Chapter 13 repayment plan.
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Work on improving credit score by paying bills on time and lowering credit utilization.
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Be completely transparent with lender by disclosing debts and providing all documentation.
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Prepare for added scrutiny – Chapter 13 applicants often face a lengthier approval process.
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Lean on guidance from your bankruptcy attorney when navigating the USDA loan process.
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If denied, be patient and build your case over time by demonstrating you are financial stable.
The bottom line is that getting USDA financing while in active Chapter 13 bankruptcy is possible with effort and perseverance. Consult experienced lenders to discuss your specific situation. With a steady job, sufficient income, timely Chapter 13 payments and responsible credit management, you can potentially join the thousands of USDA borrowers who have achieved the dream of homeownership.
Frequency of Entities
- USDA loan – 20 times
- Chapter 13 bankruptcy – 18 times
- Chapter 13 – 16 times
- Bankruptcy – 7 times
- Homeownership – 4 times
- Rural – 3 times
- Mortgage – 3 times
- Lender – 3 times
- Debt – 3 times
- Trustee – 3 times
FHA loan with Chapter 13 bankruptcy
To qualify for an FHA loan during Chapter 13, you need to be at least 12 months into your repayment plan. And you must have made all Chapter 13 payments on time. In addition, the bankruptcy court or bankruptcy attorney needs to give written permission for you to take out a new mortgage loan.
If you successfully complete your repayment plan and get a Chapter 13 discharge, there is no waiting period for an FHA loan. However, your loan will be referred for manual review by an underwriter unless it’s been two years since the discharge date. To get an automated, computerized approval, it has to be two years since the Chapter 13 discharge.
This is an important point because many lenders will not manually approve a home loan. They will deny the loan unless it gets an “approved status” from a computerized underwriting system. Because of this, many mortgage lenders require a waiting period of two years from the discharge date in practice.
Still, an FHA mortgage might be the most attractive type of loan if you’re buying a house while in Chapter 13 bankruptcy or were recently discharged from one.
FHA loans have easier credit requirements than other mortgage programs and are especially attractive to first-time home buyers.
The Federal Housing Administration, which insures these loans, only requires a 580 credit score and 3.5% down payment. You might even get away with a credit score of 500-579 if you can put 10% down. But you’ll have a harder time finding a willing lender.
Other FHA mortgage requirements include:
- Your debt-to-income ratio (DTI) is below 50%
- You’re purchasing the home as a primary residence
- The loan is within current FHA loan limits
- You have steady employment and income
Most mortgage lenders are approved to do FHA loans, so first-time home buyers can shop around for a good deal. If one lender doesn’t approve you because of your Chapter 13, but you’re past the 12-month mark and meet loan requirements, try again with a different mortgage company. You might have more luck.
Step 2: Work with your bankruptcy attorney
It’s time to consult with your bankruptcy attorney once you have a firm grasp of your financial situation. Discuss your desire to purchase a home with them and seek their advice on the viability of this move. Your lawyer can give you useful information about the legal processes involved, their potential effects on your current bankruptcy case, and methods to increase your chances of getting a mortgage. This step is critical because it lays the groundwork for the rest of the process.
Getting a USDA loan after Chapter 13 Bankruptcy is faster than you think!
FAQ
Can you get a loan while in Chapter 13?
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