Buying a house after Chapter 13 bankruptcy

Buying a house after Chapter 13

If you filed for Chapter 13 bankruptcy or were recently discharged, you might wonder whether you qualify for a mortgage.

The good news is that getting a home loan 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 bankruptcy.

In this article (Skip to...)

• Chapter 13 and mortgages
• Chapter 13 waiting periods
• FHA loan rules
• VA and USDA loan rules
• Conventional loan rules
• Alternative loan options
• Tips to qualify
• How to find a lender

Can you buy a house after Chapter 13 bankruptcy?

It’s definitely possible to buy a house after Chapter 13 bankruptcy. In some cases, mortgage lenders will approve your loan application while you are still working through a Chapter 13 repayment plan.

Most lenders are easier on applicants who file for 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 unsecured debts, including credit cards and medical bills.

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

• Mortgage after Chapter 7 bankruptcy: Two to three years after discharge
• Mortgage after 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 Chapter 13 on your credit report, while conforming loans (backed by Fannie Mae and Freddie Mac) impose longer waiting periods.

How long do you have to wait to buy a house after Chapter 13?

How long you have to wait to buy a house after Chapter 13 depends on your loan program and the status of your bankruptcy filing.

If you’re using an FHA, VA, or USDA loan, you can apply for a mortgage as soon as 1 year after filing for Chapter 13 bankruptcy and there’s no waiting period after being discharged. Conventional loans, however, will not approve you while in Chapter 13 and require a two-year waiting period after discharge.

*Freddie Mac and Fannie Mae will not allow buyers to purchase a home with a conventional loan until after Chapter 13 bankruptcy has been discharged or dismissed.

Keep in mind that mortgage companies are allowed to set their own approval guidelines beyond those listed above. “Some lenders will require longer periods before you are able to get a loan,” cautions Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

If an underwriter denies your application, it’s worth trying another lender. You might have an easier time if you work with a mortgage broker who specializes in home buying for those who have declared bankruptcy.

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 two-year waiting period after Chapter 13 discharge

If your bankruptcy was dismissed rather than discharged, on the other hand, the waiting period is extended to four years for a conventional loan.

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. The same is technically true for FHA, though in practice, many lenders won’t consider your loan until two years after discharge.

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 loan. They will deny the loan unless it gets an “approved status” from a computerized underwriting system. Because of this, many 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 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 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.

VA and USDA loans with Chapter 13 bankruptcy

Like FHA loans, VA and USDA loans are backed by the federal government. They also 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 need:

• Qualifying military service: You must be an eligible veteran, service member, or surviving spouse
• Fair to good credit: 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 very affordable, but a bit harder to qualify for. You’ll need to:

• Meet income eligibility: This loan type is meant for low- to moderate-income home buyers in qualified rural areas. Your household income can’t be more than 115% of the area median income
• Have good credit: Most USDA lenders require a FICO score of at least 640
• Buy in a rural area: USDA loans are only available in areas defined as “rural” by the Department of Agriculture. However, this broad definition includes about 97% of the U.S. landmass

Borrowers in Chapter 13 might have more luck with an FHA mortgage thanks to its lenient credit history requirements.

Conforming loans with Chapter 13 bankruptcy

It’s much tougher to get a conforming loan after a Chapter 13 bankruptcy filing. 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 your Chapter 13 discharge date; or
• Four years after your Chapter 13 dismissal date

Remember, discharge happens after you complete the 3- or 5-year repayment plan. So altogether it could take up to seven years after filing for Chapter 13 before you can get a conventional loan. (Five years until discharge plus the two-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 four 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:

• Severe illness or disability
• Company layoff
• Death of the primary wage-earner

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

Alternative loan options with Chapter 13

Some alternative mortgage programs offer home loans to people in Chapter 13 bankruptcy. These Non-Qualified Mortgages (“Non-QM loans”) 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 fund these types of loans, and borrowers can expect to pay higher mortgage interest rates and fees. But they may be appropriate if you want to borrow higher loan amounts or wait less time before borrowing.

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. But here are some tips to increase your chances of mortgage approval after a Chapter 13 bankruptcy filing:

• Re-establish your good credit. Take steps to build new credit by paying down debts and making on-time payments for utilities, credit cards, and car loans
• Meet standard lending guidelines. These include requirements for credit score, income, employment, and down payment, among other things. Having a stable income and plenty of savings may help you qualify if you have past credit issues
• Supply extra documents due to your Chapter 13. Lenders will likely require copies of your bankruptcy petition and discharge or dismissal documents
• Make sure you’ve budgeted correctly for new debt. Remember that your mortgage payment will include taxes and insurance as well as loan 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.

Which 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 and some will be more amenable to borrowers with Chapter 13 than others.

In addition, you’ll have better luck if your finances are currently stable. A better credit score or higher income can work in your favor when you have past credit issues. If you’re right on the edge of qualifying — for instance, if your score is exactly 580, you have low income, and you want an FHA loan — it could be tougher to get approved.

You’ll also 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 buying a home or refinancing 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 loan.

Still, take into account that your credit score is damaged after bankruptcy. So even if lenders will underwrite home loans to bankrupt buyers after a year, you may need more time to repair your credit.

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.