The Short Answer is “Yes,” you can get a mortgage while in Bankruptcy. During any bankruptcy, there are a number of hurdles you may encounter when requesting new credit such as a mortgage. There are however ways to navigate these hurdles successfully. Here at Peoples Bank Mortgage, we specialize in assisting individuals who are struggling to get a mortgage during Chapter 13 bankruptcy. Learn more about how our bankruptcy mortgage division is able to help, and have you well on your way to getting a mortgage during bankruptcy.
Filing for Chapter 13 bankruptcy can feel like a major setback when you’re trying to buy a house. But it doesn’t have to derail your homeownership dreams.
With the right preparation, you can get approved for a mortgage loan even while making payments under a Chapter 13 repayment plan. The key is knowing what to expect, choosing the right loan program, and taking steps to improve your financial profile.
What is Chapter 13 Bankruptcy?
Chapter 13 is a form of personal bankruptcy that allows you to repay your debts over 3 to 5 years. This is different from Chapter 7 bankruptcy, where your eligible debts are wiped out entirely.
To file Chapter 13, you submit a repayment plan to the bankruptcy court showing how you’ll catch up on owed payments. This can include credit cards, medical bills, personal loans, and past-due mortgage and auto payments. As long as you stick to the plan, you get to keep your assets like your house and car.
Once you successfully complete the repayment plan, the court discharges your remaining unsecured debts. This gives you a financial fresh start. Your public bankruptcy records also get updated to show the discharge.
When Can You Apply for a Mortgage in Chapter 13?
Many homeowners worry that filing Chapter 13 means they can’t buy a home for 7 years or longer. But that’s not always true, especially if you need to purchase soon.
Here are the basic timelines for getting a home loan with Chapter 13 bankruptcy:
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FHA loans – You can apply 12 months after filing for Chapter 13, as long as you’ve made timely payments and get court approval. There’s no waiting period after discharge.
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VA and USDA loans – You can also apply after 12 months of on-time Chapter 13 payments. No wait after discharge.
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Conventional loans – You must wait until after your Chapter 13 discharge to apply. Then there’s a 2-year waiting period.
As you can see, government-backed mortgages like FHA, VA, and USDA loans offer more flexibility if you want to buy a house while still making Chapter 13 payments.
Conventional loans backed by Fannie Mae and Freddie Mac require you to complete your bankruptcy plan first.
Securing the Court’s Permission
Before applying for a mortgage, you need written approval from the bankruptcy court or your bankruptcy lawyer. This ensures the new debt won’t jeopardize your existing Chapter 13 repayment plan.
Your bankruptcy attorney can file a motion with the court providing details like:
- Purchase price of the home
- Down payment amount
- Projected monthly mortgage payment
The court will review the impact on your finances As long as the numbers check out, you should get approved to move forward with a mortgage application
Improving Your Credit Score
Lenders view borrowers more favorably when they actively work to improve their credit. So use the 12+ month Chapter 13 repayment period to build your credit score before applying for a mortgage.
Good ways to boost your credit include:
- Paying all current debts on time – credit cards, utilities, car loans, etc.
- Keeping credit card balances low
- Avoiding new credit inquiries whenever possible
- Checking credit reports for errors and disputing inaccuracies
The higher your score, the better mortgage rate and terms you can qualify for. If you have limited credit history, taking out a new credit card (with responsible use) can also help.
Qualifying for a Mortgage Under Chapter 13
In addition to court approval, you’ll need to meet the lender’s credit and income requirements to be approved.
Here are key factors lenders look at:
Credit history – Most lenders want at least a 580 FICO score for an FHA loan or VA loan. 620+ is ideal. The higher, the better.
Down payment – At least 3.5% down payment on an FHA-insured loan. Some lenders may require 10-20% down with lower scores.
Income/employment – Steady employment and income history. DTI ratio below 50% is recommended.
Mortgage payment – Needs to fit within your Chapter 13 repayment plan.
Eligible property – Single-family home or condo that you’ll occupy as your primary residence.
Bank statements – Enough assets and reserves. Lenders may ask for 12 months of bank statements.
Meeting these requirements proves you can afford the new mortgage payment on top of your bankruptcy plan payments. It assures the lender that Chapter 13 won’t cause you to default on the mortgage.
Finding a Lender to Approve Your Loan
Shopping with multiple mortgage lenders is important. Each lender has its own eligibility guidelines.
National banks and mega-lenders may be less likely to approve a Chapter 13 borrower. But smaller banks and credit unions could be more flexible.
Mortgage brokers who specialize in financing for borrowers with credit challenges are another good option. They have relationships with “non-QM” lenders that offer alternative loan programs.
Getting pre-approved by several lenders gives you the best chance of getting approved on the terms you want. Cast a wide net and compare options.
Tips for Getting Approved for a Mortgage in Chapter 13
- Wait at least 12 months into your Chapter 13 plan before applying
- Get the bankruptcy court’s approval to take on new mortgage debt
- Pay all bills on time and keep credit card balances low
- Build up your credit score as much as possible
- Shop with multiple lenders to compare mortgage rates and programs
- Be prepared to supply extra documentation about your bankruptcy
- Consider government-backed loans like FHA, VA, and USDA first
The most important thing is showing lenders that your finances are stable now. Account for the added costs of homeownership in your household budget. And make sure Chapter 13 won’t jeopardize your new mortgage payments.
With proper planning and preparation, there’s still an opportunity to buy a home and start building equity, even while repaying debts through bankruptcy.
Alternatives if You Can’t Qualify for a Mortgage Yet
If your credit score or bankruptcy status mean you can’t qualify for a mortgage loan yet, consider these alternatives to get into a home sooner:
Rent for 1-2 years – Take time to complete Chapter 13 and let your credit score recover. Save up a larger down payment in the meantime.
Get a cosigner – Ask a family member with good credit to cosign the mortgage with you. Their income and score can offset your bankruptcy.
Look at alternative mortgages – Non-QM lenders offer loans with extended timelines or higher pricing to offset bankruptcy risk.
Lease-to-own – Rent the home you want for 1-2 years, with option to purchase once your finances improve.
Buy as an investment property – Some lenders approve lower scores for a second home or investment property. You can house hack, renting out part of the property to offset the costs.
Buy a fixer-upper with cash – Purchase a more affordable home with cash, then renovate it over time. No mortgage financing needed.
Don’t get discouraged if you can’t get a home loan just yet. With determination and smart financial moves, you can buy a house after Chapter 13 bankruptcy faster than you may think.
Common Questions about Home Loans in Chapter 13
Q: How long do I have to wait to refinance my mortgage after Chapter 13?
You can refinance an existing mortgage starting 12 months into your Chapter 13 repayment plan, the same as purchasing a home. Lenders will want to see you’ve made timely payments before approving your refinance.
Q: Can I remove PMI from my mortgage while in Chapter 13 bankruptcy?
Yes, it is possible to remove PMI during Chapter 13 if you have at least 20% equity through appreciation or improvements. You would go through the same standard mortgage process to drop PMI as someone not in bankruptcy.
Q: Do repossessions and foreclosures make it harder to qualify for a mortgage?
Yes. Most lenders require at least 1-2 years of reestablished good credit after a repossession or foreclosure before they will approve your mortgage application.
Q: What happens if I successfully complete Chapter 13 then need to buy a house?
After receiving a Chapter 13 discharge, you can qualify for an FHA loan right away. Conventional loans require a 2-year waiting period after discharge before applying.
Q: Where can I find lenders that will work with Chapter 13 borrowers?
Online mortgage brokers, small community banks, and credit unions may be more flexible than big banks when it comes to lending to borrowers in Chapter 13 bankruptcy.
Final Thoughts
The Chapter 13 bankruptcy process gives you time to catch up on debts and repair your credit. With careful planning and preparation, you can potentially buy a home and obtain affordable mortgage financing along the way.
Stick to your Chapter 13 repayment plan. Build your credit score. And shop around with lenders to explore available mortgage options. There’s still a path to achieving your homeownership goals.
Mortgage During Bankruptcy and Your Trustee
When you choose to work with a Chapter 13 Bankruptcy trustee, you must pay back all of your debts within three to five years. The Chapter 13 trustee will oversee all aspects of the agreement to repay your debt. You must send the specific payment amount every month until your debt is paid in full. The reason for this timeline of payments is to ensure the creditors receive their funds in a timely manner. The creditors are assuming the risk of the debtor’s bankruptcy payment plan. Your trustee will determine if getting a mortgage during Chapter 13 bankruptcy will increase the likelihood that you will continue to make your regular payments. At the very least your new mortgage must not hinder your ability to repay your obligations.
Review of Your Application:
Our experienced team of mortgage professionals will review your application to ensure that all the necessary information is included and that your new mortgage will put you in a better financial situation. We will verify your income, employment, and assets to ensure that you meet the minimum requirements for a mortgage. We will also check for any errors or discrepancies in your credit report and address them with you. This diligence will increase the likelihood that your trustee will approve your request to get a mortgage during bankruptcy.