Mortgage  Question?
Qualify USDA home loan within year Chapter 13 bankruptcy?

Can I qualify for a USDA home loan within a year of a Chapter 13 bankruptcy? One lender told me yes but multiple lenders said no. Can I qualify?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

It is challenging but not impossible to qualify for a USDA Home Loan within twelve months of the discharge of a Chapter 13 bankruptcy. According to USDA Program guidelines, borrowers are generally required to wait one year following a Chapter 13 bankruptcy before applying for a USDA Home Loan. Lenders can apply for a credit exception, however, that permits borrowers to qualify earlier than a year and in some cases before their Chapter 13 bankruptcy has been discharged.  To be eligible for a credit exception, borrowers within a year of  a Chapter 13 bankruptcy discharge or who are currently participating in a Chapter 13 bankruptcy program administered by a judge must demonstrate a history of on-time payments.  Additionally, if your Chapter 13 bankruptcy has not been discharged then the judge administering your program must verify that you are successfully completing the program and that you have the financial ability to pay a mortgage.

To qualify for a credit exception, which enables you to qualify for the loan without waiting a year, lenders must demonstrate that the borrower's derogatory credit event (such as a Chapter 13 bankruptcy) was caused by temporary, extenuating circumstances such as job loss, medical illness, business dispute or reduction in benefits. The other way to qualify for a credit exception is if your new USDA home loan reduces your monthly housing expense by 50% or more although it sounds like that does not apply to you.  So to answer your question, it is possible to qualify for a USDA Home Loan within twelve months of the discharge of a Chapter 13 bankruptcy but you must qualify for a credit exception which requires the lender to do additional work. If you do not meet the credit exception criteria then you will likely be required to wait a year before applying for a USDA home loan.

I recommend that you ask the lender that said you could qualify with if she has reviewed your application with the underwriter and what conditions, if any, are required by the underwriter for your loan to be approved. Do not spend any money on fees before getting this question answered as there are many cases where lenders promise borrowers that their application will be approved only to have the underwriter later reject it and then the borrower is out a bunch of money on upfront costs.

At the same time, I also recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as qualification guidelines vary, as you have have already experienced.

When you contact lenders provide your financial profile including your monthly income and debt, job history, credit score and bankruptcy information but request that they do not pull your credit report until you have clarity if they think you can be approved for the loan. In reality, multiple lenders pulling your credit report within a short period of time has the same impact as one lender pulling your credit report (so you are not penalized for shopping multiple lenders for a mortgage) but you can request that lenders not pull your report until after they have evaluated your situation and you decide to move forward.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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