Home buying with Chapter 13 bankruptcy: What are your options?

Gina Pogol
The Mortgage Reports contributor

Chapter 13 bankruptcy doesn’t ruin your mortgage chances

If you filed for Chapter 13 bankruptcy or were recently discharged, you might wonder whether you can buy a new home or refinance.

The good news is, getting a mortgage is easier after Chapter 13 bankruptcy than Chapter 7.

You might even qualify while you’re still in Chapter 13. Government-backed FHA, VA, and USDA loans let you apply for a mortgage as early as one year into your repayment plan.

Keep in mind, you need to make those payments on time. And you still need to meet loan requirements.

But if you meet these guidelines, you should have a good shot at getting a mortgage during or after Chapter 13.

Check your mortgage eligibility (Apr 9th, 2021)

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How Chapter 13 bankruptcy affects your mortgage eligibility

In many cases, mortgage lenders will say yes to your loan application while you are still working through a Chapter 13.

Most mortgage lenders look more favorably on applicants who file Chapter 13 than those who file for Chapter 7 bankruptcy. That’s because Chapter 13 filers have made an effort to repay at least some part of their debts.

This is reflected in the minimum waiting period to get a loan after each type of bankruptcy:

  • Chapter 7 bankruptcy: 2-3 years after discharge
  • Chapter 13 bankruptcy: 12 months after filing

Of course, you’ll still have some extra hurdles to clear if you want to buy real estate while in Chapter 13.

A lender needs to see you’ve taken meaningful steps to improve your credit and debt management before it will approve you for a home loan.

The requirements to buy a house during or after Chapter 13 depend on the type of mortgage you hope to use.

Government-backed loans are more lenient about a Chapter 13 on your credit report, whereas conforming loans (backed by Fannie Mae and Freddie Mac) impose long waiting periods.

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 those 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 completed your repayment plan and got 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 loan. They will deny the loan unless it gets an ‘approved’ status from a computerized underwriting system.

So in this way, many lenders will require a waiting period of two years from the discharge date.

Still, an FHA mortgage might be the most attractive type of loan if you’re currently in a Chapter 13 plan or were recently discharged from one.

Benefits of an FHA loan with Chapter 13

FHA loans have easier credit requirements than other mortgage programs.

The Federal Housing Administration, which insures these loans, only required 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 requirements you’ll need to meet for an FHA mortgage 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 you 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.

Verify your FHA loan eligibility (Apr 9th, 2021)

VA and USDA loans with Chapter 13 bankruptcy

Like FHA loans, VA and USDA loans are backed by the federal government. And they have similar rules about qualifying with Chapter 13.

  • You must be at least 12 months into your repayment plan, with on-time monthly payments
  • You need written approval from the court or bankruptcy attorney to apply for the loan
  • You need to meet loan program guidelines

If you completed your full Chapter 13 plan and the court has discharged you, there are no special criteria to apply for a VA or USDA loan.

Both these loan programs have similar benefits. No down payment is required, and mortgage rates tend to be very low.

To qualify for a VA loan, you must be an eligible veteran, service member, or surviving spouse.

The Department of Veterans Affairs technically does not set a minimum credit score for these loans. But most lenders require a FICO score of at least 580-620.

USDA loans are meant for low- to moderate-income home buyers in qualified rural areas.

These loans are very affordable, but a bit harder to qualify for. You’ll need a FICO score of at least 640 for a USDA loan. Borrowers in Chapter 13 might have more luck with an FHA mortgage. 

Check your zero-down loan eligibility (Apr 9th, 2021)

Conforming loan with Chapter 13 bankruptcy

It’s much tougher to get a conforming loan after Chapter 13 bankruptcy.

Fannie Mae and Freddie Mac — the two agencies that set conforming loan rules — are stricter than the government agencies. They will not allow borrowers to apply while working through a Chapter 13 plan.

Your bankruptcy must be either discharged or dismissed to qualify for a conventional mortgage. And there’s a waiting period:

  • Two years after Chapter 13 discharge date
  • Four years after Chapter 13 dismissal date

Remember, discharge happens after you complete the 3- or 5-year repayment plan.

So altogether it could take up to 7 years after filing for Chapter 13 before you can get a conventional loan. (5 years until discharge plus the 2-year waiting period.)

Filers who fail to complete the plan may have their bankruptcy “dismissed.” They probably still owe their creditors and will have to wait at least 4 years from the dismissal date before they can apply for conventional financing.

Filers with multiple bankruptcies in the past seven years will have to wait at least seven years from their most recent discharge before applying.

Extenuating circumstances

It may be easier to buy a house after Chapter 13 discharge if your bankruptcy was caused by “extenuating circumstances.”

Extenuating circumstances are typically one-time events outside your control that have a serious negative impact on your finances.

Examples include a severe illness or disability, a company layoff, or the death of the primary wage-earner.

If your Chapter 13 falls into this category, the waiting period for a conventional loan drops to 2 years after dismissal. (The waiting period after discharge stays the same, at 2 years.)

Freddie Mac offers a clear test for determining if a bankruptcy has extenuating circumstances:

  • Were the events beyond your control?
  • Has the problem been resolved?
  • Is the problem likely to happen again?

Understand that these tests do not apply to every program. Talk to several lenders about your circumstances to learn when you qualify to apply for a loan following a Chapter 13 discharge or dismissal.

Check your conventional loan eligibility (Apr 9th, 2021)

Alternative loan options with Chapter 13

Some alternative mortgage programs (called Non-QM, Alt-A or Non-Prime) offer home loans to people in Chapter 13 plans.

Non-Qualified Mortgages (Non-QM) do not meet the standards for government or conforming mortgages. As such, they’re not eligible for backing from Fannie Mae, Freddie Mac, or any federal agency.

Lenders assume extra risk when they choose to fund these mortgages, and their costs are higher. But they may be appropriate if you want to borrow higher loan amounts or wait less time before borrowing.

Expect to pay higher interest rates and fees for one of these mortgages.

Chapter 13 dismissal vs. discharge: How soon can I apply for a mortgage?

Mortgage lenders look differently at bankruptcy discharge and bankruptcy dismissal.

A discharge means you’ve completed your court-ordered repayment plan. Lenders look more favorably on this, because it means you made your debt payments on time and worked hard to improve your finances.

If you want to buy a house after Chapter 13 discharge, there’s no waiting period for an FHA, VA, or USDA loan (provided you meet loan requirements).

For a conventional loan, there’s a 2-year waiting period after Chapter 13 discharge.

But if your bankruptcy was dismissed rather than discharged, that waiting period is extended to 4 years for a conventional loan.

The longer waiting period accounts for the fact that Chapter 13 discharge only happens after your repayment period is up — so it’s been at least 3-5 years since your filing date by default. 

The major benefit of applying for a VA or USDA loan is that you don’t need to wait for your bankruptcy to be discharged or dismissed.

You can apply for these mortgages just 12 months into your repayment plan.

That means you could qualify for a mortgage just one year after you file for Chapter 13 — you don’t have to wait the full 5-7 years for a conforming loan.

Technically the same is true for FHA, but many lenders still won’t consider the loan until two years after discharge.

Verify your mortgage eligibility (Apr 9th, 2021)

Tips to qualify for a mortgage with Chapter 13

Just meeting the 12-month requirement for a government loan doesn’t guarantee you’ll qualify.

You still need to meet lending guidelines for credit score, income, employment, and down payment, among other things.

These will all need to be documented and verified during underwriting.

And you may need to supply extra documents due to your Chapter 13. Lenders might require copies of your bankruptcy petition and discharge or dismissal documents. 

Finally, make sure you’ve budgeted correctly for homeownership.

Remember that your mortgage payment will include taxes and insurance as well as principal and interest. If you put less than 20% down, it will also include private mortgage insurance or FHA mortgage insurance.

These added costs can increase a mortgage payment substantially.

Before you jump into the application process, set aside some time to think about your maximum budget for payments and how the cost of homeownership will fit in with your debt repayment plan.

What lenders will approve a loan during Chapter 13?

VA, USDA, and, sometimes, FHA loans are available during Chapter 13 bankruptcy. Most major lenders are authorized to do FHA and VA loans. USDA mortgages are a little harder to find.

Remember that mortgage lenders can set their own lending rules. Some may be more amenable to borrowers with Chapter 13 than others.

In addition, you’ll have better luck if you’re not ‘borderline’ — meaning you’re firmly eligible for the type of loan you want.

If you’re right on the edge of qualifying — for instance, if your score is exactly 580, you have lower income, and you want an FHA loan — it could be tougher to get approved.

You’ll need to shop around and compare your options.

All mortgage borrowers should shop for their best interest rate. But for borrowers with Chapter 13 this is doubly important.

You’re not just shopping for a good deal; you’re shopping for a lender that’s willing to approve you.

Do you qualify for a mortgage?

Having a Chapter 13 bankruptcy in your credit history shouldn’t stop you from getting a mortgage.

You might even be able to buy a home during Chapter 13 if you’re in good standing with your repayment plan and you qualify for the mortgage.

If you’ve been working hard to pay down debts and improve your financial situation during Chapter 13, you might be able to get a home loan a lot sooner than you think.

Verify your new rate (Apr 9th, 2021)