Buying A House While in Chapter 13 Bankruptcy | 2024

Is it possible to buy a home during 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 securing a mortgage after Chapter 13 bankruptcy is generally easier than Chapter 7. In fact, buying a house while in Chapter 13 bankruptcy is possible. Government-backed FHA, VA, and USDA loans let you apply for a mortgage as early as one year into your repayment plan.

However, it’s crucial to make all your payments on time and meet the lender’s requirements. If you do, you’ll likely have a strong chance of buying a house in Chapter 13 or shortly after discharge.

In this article (Skip to...)

• Chapter 13 and mortgages
• Chapter 13 waiting periods
• Chapter 13 lenders
• Dismissal vs discharge
• Mortgage loan options
• Buying during bankruptcy
• Tips to qualify
• FAQ

Can you buy a house after Chapter 13 bankruptcy?

It’s definitely possible to buy a house after Chapter 13 bankruptcy. In fact, some mortgage lenders that work with Chapter 13 may approve your loan application even while you’re still in the 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 when buying a house while in Chapter 13 bankruptcy. A mortgage lender will want to see you’ve taken meaningful steps to improve your credit and manage your debt before approving your home loan.

The requirements for buying a house while 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?

The time frame for purchasing a house after Chapter 13 hinges on both your loan program and the stage 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.

If an underwriter denies your application, don’t be discouraged. It’s worth trying another mortgage lender, as you might have more success with one that understands the nuances of buying a house after Chapter 13. Working with a mortgage broker who specializes in assisting homebuyers who have declared bankruptcy can also make the process smoother and increase your chances of approval.

Mortgage lenders that work with Chapter 13 bankruptcy

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 buying a house while in Chapter 13 bankruptcy 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 buying a house in 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.

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 and pursue buying a house while in Chapter 13 bankruptcy. The same is technically true for FHA, though in practice, many mortgage lenders won’t consider your loan until two years after discharge.

Mortgage options for Chapter 13 bankruptcy

Individuals in Chapter 13 bankruptcy have several mortgage options available to them, including FHA, VA, and USDA loans.

However, each of these options comes with specific requirements and waiting periods, and securing a mortgage often requires court approval, a history of timely payments in the bankruptcy case, and a demonstrated ability to handle the new debt.

FHA loan with Chapter 13 bankruptcy

To qualify for an FHA loan while in Chapter 13, you need to be 12 months into your repayment plan with all payments made on time. You’ll also need written permission from the court or your attorney to get a new mortgage.

After completing your plan and receiving a discharge, there’s no waiting period to apply for an FHA loan. However, if it’s been less than two years, your mortgage will go through manual underwriting. Since many mortgage lenders that work with Chapter 13 prefer automated approvals, they often impose a two-year waiting period after discharge.

Despite this, an FHA mortgage remains a great option for buying a house in Chapter 13 or shortly after discharge, offering flexibility to make homeownership possible post-bankruptcy.

Benefits of an FHA loan with Chapter 13

FHA loans are popular with first-time home buyers due to their easier credit requirements. You can qualify with a 580 credit score and 3.5% down, or with a score as low as 500 if you put 10% down—though finding a lender may be tougher.

To qualify for an FHA loan during or after Chapter 13, you’ll also need to meet these requirements:

• 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 offer FHA loans, so first-time home buyers can shop around for a good deal. If one lender doesn’t approve you while you’re buying a house in Chapter 13 or just after, especially if you’re past the 12-month mark and meet FHA’s 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 mortgage loan programs have similar benefits. No down payment is required, and mortgage rates tend to be very low, making them attractive options for buying a house after Chapter 13.

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 who are buying a house while in Chapter 13 bankruptcy 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 filing 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 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 mortgage 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 bankruptcy

Some alternative mortgage programs provide options for buying a house while 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.

Buying a house while in Chapter 13 bankruptcy

Embarking on the journey of buying a house while in Chapter 13 bankruptcy may seem daunting, but it’s entirely possible. Here’s a comprehensive, step-by-step guide to help you navigate this process.

Step 1: Evaluate your personal finances

The first step when buying a house while in Chapter 13 bankruptcy is a thorough assessment of your current financial situation. This entails a careful analysis of your earnings, expenses, and the money you’re setting aside for your Chapter 13 repayment plan.

Knowing how much you can afford to spend on a new house without endangering your bankruptcy plan or your financial stability is essential.

This step may involve making a thorough budget, keeping tabs on your spending, and figuring out where you can make savings for a down payment.

Step 2: Work with your bankruptcy attorney

After assessing your financial situation, consult your bankruptcy attorney about buying a house in Chapter 13. They can offer valuable insights into the legal implications, impacts on your bankruptcy case, and strategies to enhance your chances of mortgage approval. This step is essential for laying the groundwork for the process ahead.

Step 3: Secure court approval

The next step when buying a house while in Chapter 13 bankruptcy is to secure approval from the bankruptcy court to take on new debt, which includes a mortgage. This process typically involves your attorney filing a motion with the court and providing all the necessary information, such as the home purchase price, down payment amount, and projected monthly mortgage payments.

The court will review this information to ensure that the home purchase won’t adversely affect your ability to make your Chapter 13 plan payments. This step can take some time, so it’s important to be patient and cooperative.

Step 4: Improve your credit score

While your motion is being processed, use this time to work on improving your credit score. This entails paying off all of your current debts on time and refraining from taking on any additional debt. A higher credit score will make you more appealing to potential lenders and may help you secure a lower mortgage interest rate. In this step, you might check your credit report for mistakes, settle any outstanding debts, and build a history of responsible credit usage.

Step 5: Get mortgage preapproval

Once you’ve received court approval and worked on your creditworthiness, it’s time to seek preapproval for a mortgage. This involves providing a potential lender with financial information, such as your income, savings, and investments.

The lender will then give you a letter stating how much they’re willing to lend you. This preapproval letter can give you a clearer idea of what homes you can afford and can make you more appealing to sellers.

Step 6: Begin house search and make an offer

With your preapproval letter, start searching for your new home! Remember to factor in all costs of homeownership—like property taxes, homeowners insurance, and maintenance—beyond just the purchase price. Think about your future needs as well.

When you find the right fit, make an offer. If the seller accepts, you’ll move into the closing process, which includes finalizing your mortgage and completing necessary paperwork for buying a house after Chapter 13.

Step 7: Close on your new home

After all the paperwork is signed and the mortgage is finalized, you can close on your new home. This is the final step in the home buying process and marks the beginning of your journey as a homeowner. Celebrate this significant achievement!

Buying a house while in Chapter 13 bankruptcy requires careful planning, patience, and the right guidance. But with a clear understanding of the process and a commitment to financial responsibility, it’s certainly achievable.

Tips to qualify for a mortgage with Chapter 13 bankruptcy

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 house 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.

Working with bankruptcy attorneys while in Chapter 13

When trying to buy a house while in Chapter 13 bankruptcy, hiring a bankruptcy lawyer can be extremely beneficial. A lawyer with bankruptcy experience can offer invaluable guidance, assist you in navigating the difficult legal processes, and help you get court approval.

In order to ensure that all required paperwork is completed accurately and submitted on time, your attorney can also communicate with your bankruptcy trustee. They can represent you in court and help you prepare your motion for court approval.

A bankruptcy attorney can also provide advice on how to manage your bankruptcy case, such as making consistent payments to creditors, adhering to a budget, and making preparations for a future home purchase. Additionally, they can offer guidance on repairing your credit and preparing for a mortgage application.

FAQ: Buying a house while in Chapter 13 bankruptcy

Do you qualify for a mortgage when buying a house while in Chapter 13?

Having a Chapter 13 bankruptcy in your credit history shouldn’t stop you from buying a home or refinancing a mortgage. Buying a house while in Chapter 13 bankruptcy may still be possible 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.