Getting a Home Loan During Chapter 13 Bankruptcy: A Complete Guide

Filing for Chapter 13 bankruptcy can be a difficult process Many people wonder if they can get approved for a home loan while in an active Chapter 13 case In this comprehensive guide, we’ll explain everything you need to know about getting a mortgage during Chapter 13 bankruptcy.

Overview of Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows people with regular income to keep their property while repaying some or all of their debt over 3-5 years. This type of bankruptcy stays on your credit report for 7 years from the filing date.

To qualify for Chapter 13 you must have a regular income and debts below the state limit. You’ll make monthly payments to a bankruptcy trustee, who distributes the funds to creditors. After completing all payments, the remaining dischargeable debts are wiped out.

Can You Get a Mortgage During Chapter 13 Bankruptcy?

The short answer is yes, you can get a home loan while in active Chapter 13 bankruptcy. However, there are strict requirements you must meet:

• At least 12 on-time monthly Chapter 13 plan payments – Most lenders want to see a full year of on-time trustee payments. This shows you can handle the additional debt.

• Trustee approval – The trustee must approve incurring new mortgage debt during your bankruptcy repayment plan

• Bankruptcy court permission – You’ll need the bankruptcy judge to authorize taking on new mortgage debt.

• Stable income – Lenders want to see reliable income to prove you can afford mortgage payments.

• Sufficient credit scores – Most lenders require minimum credit scores of 580-620 or higher.

Meeting these requirements is challenging but possible. Thorough preparation and working with an experienced lender can help get approval for a home loan during Chapter 13 bankruptcy.

Refinancing Your Mortgage in Chapter 13

Many homeowners in Chapter 13 want to refinance their mortgage to lower their interest rate or monthly payment. Here are some key points about refinancing during active bankruptcy:

• You must have enough equity in your home to refinance. Lenders generally require at least 20%.

• The trustee and judge must approve the refinance terms and new monthly payment.

• On-time Chapter 13 payments are essential. 12-24 months of perfect plan payments are ideal.

• Your bankruptcy attorney will petition the court for approval once refinance terms are ready.

• Closing costs can be financed into the new loan amount in most cases.

Overall, refinancing in Chapter 13 is possible if you’ve made timely payments and have sufficient equity. Your attorney and an experienced lender are key to navigating the process smoothly.

Using Home Equity to Pay Off Chapter 13 Debt

If you have significant equity built up in your home, you may be able to pay off your remaining Chapter 13 debt early via a cash-out refinance. Here’s how it works:

• Your home value must exceed your mortgage balance by the payoff amount.

• Bankruptcy court approval is required before proceeding.

• Any excess cash after paying your Chapter 13 balance becomes available to you.

• Your bankruptcy case can potentially be discharged shortly after.

• Be mindful of closing costs – make sure they don’t eat into proceeds too much.

Paying off Chapter 13 early via home equity cash-out is an excellent option if you have enough equity and meet lender requirements. Consult your attorney before proceeding.

Should You Buy a House During Chapter 13 Bankruptcy?

Purchasing a home before completing Chapter 13 is possible, but complex. Here are some key considerations:

• It may be better to wait until after receiving your bankruptcy discharge. This gives you a clean slate.

• You’ll need a lender who understands Chapter 13 guidelines and requirements.

• A minimum 12 months of on-time trustee payments is usually required.

• The court must approve you taking on new long-term debt.

• Budget carefully – factor in taxes, insurance, maintenance costs.

• Consult your real estate agent and attorney throughout the process.

While permitted in some cases, buying a house in Chapter 13 has risks. Proceed cautiously and get guidance from your bankruptcy attorney.

Finding a Lender Willing to Lend During Bankruptcy

Obtaining lender approval for a mortgage during active Chapter 13 can be challenging. Here are some tips:

• Ask your bankruptcy lawyer for lender referrals. They often know who may work with Chapter 13 borrowers.

• Consider mortgage brokers – they can shop multiple lenders to find one that may approve you.

• Ask lenders upfront about Chapter 13 programs and guidelines.

• Look for lenders familiar with FHA and VA loans – these are more flexible.

• Be prepared to explain your situation – lenders will want to see you’re managing the bankruptcy responsibly.

• Check online reviews before choosing a lender. Make sure others in Chapter 13 had a good experience.

With preparation and persistence, you can find a lender ready to work with you even during active bankruptcy. The key is being thorough in your search.

What Documentation Do Lenders Require?

Lenders will request extensive documentation when reviewing a mortgage application from a Chapter 13 borrower. Here are some common items:

• Chapter 13 repayment plan
• Evidence of 12+ months of trustee payments
• Bankruptcy court approval of new debt
• Last 2 years of tax returns
• Proof of income
• Bank statements showing cash reserves
• Explanation of bankruptcy events from your attorney

Expect lenders to dig deeply into your Chapter 13 status, budget, and ability to handle mortgage payments. Having all documents ready avoids delays.

Overcoming Low Credit Scores During Chapter 13

Since Chapter 13 bankruptcy damages your credit, meeting minimum credit score requirements for a mortgage can be hard. Here are tips for improving your scores:

• Don’t miss any trustee payments – on-time payments help rebuild scores.
• Keep credit card balances low and pay on time.
• Hold off applying for new credit until after receiving your discharge.
• Ask lenders if they offer mortgages for low scores – some have programs starting at 580 FICO.
• A down payment of at least 10% improves your approval chances.
• Wait until month 13 or later of your repayment plan. This allows more time to improve scores.

With diligence and patience, you can work to raise credit scores high enough to get a mortgage approval during Chapter 13.

Alternatives if You Can’t Get Approved for a Mortgage

If you aren’t able to get approved for a home loan during Chapter 13, here are two alternatives to consider:

1. Buy When Your Bankruptcy Is Discharged

• Wait until the bankruptcy court grants your discharge after completing the repayment plan.

• Discharge wipes out dischargeable debts and allows you to rebuild credit.

• You’ll have a clean slate to qualify for better mortgage rates/terms after discharge.

2. Rent Until After Chapter 13 Completion

• Continue renting and focus on completing your bankruptcy plan.

• Save up for a larger down payment – at least 10-20% of the purchase price.

• Work on improving your credit – scores of 700+ get the best mortgage rates.

• Interview realtors and lenders so you’re ready to buy when discharged.

If getting a mortgage now isn’t feasible, be patient. Lay the groundwork so you can buy on favorable terms when your bankruptcy is finished.

Final Thoughts

Navigating the home buying process during Chapter 13 bankruptcy can seem daunting and complex. However, with the right lender, thorough preparation, and guidance from your attorney, it is possible in many cases.

Be sure to choose an experienced mortgage lender familiar with Chapter 13 guidelines. Verify you meet all requirements for the lender and court before proceeding. Consulting your bankruptcy lawyer throughout the application process is highly recommended as well.

While challenging, getting approved for a home loan during Chapter 13 bankruptcy can be done. With persistence and a step-by-step approach, you can be on the path to homeownership even while repaying creditors through bankruptcy.