It is challenging but not impossible to qualify for a USDA home loan within a year following the discharge of a Chapter 13 bankruptcy. The process takes additional time and effort on the part of both the mortgage applicant and the lender but you should not let a Chapter 13 bankruptcy stop you from getting approved for a USDA loan.
According to USDA Program guidelines, you are generally required to wait at least one year following a Chapter 13 bankruptcy before applying for the mortgage. Lenders can apply for a credit exception, however, that enables you to qualify earlier than a year and in some cases even before your bankruptcy has been discharged.
To be eligible for a USDA credit exception, you must meet the following requirements:
a demonstrated a history of on-time payments
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
A credit exception is a written request submitted by the lender that explains why you should be approved for a USDA home loan despite a significant negative credit event such as a Chapter 13 bankruptcy. In short, you are asking for an exception to a standard guideline so that you can qualify for the mortgage.
A credit exception for a USDA loan usually includes a letter of explanation provided by the borrower that explains why the credit issue occurred and the steps you took to address the issue. The credit exception also includes a document form the lender that outlines the reasons why your application should be approved.
We recommend that you contact multiple lenders in the table below to better understand your ability to qualify for a USDA home loan.
To qualify for a credit exception, the lender must demonstrate that the your derogatory credit event -- a Chapter 13 bankruptcy in this case -- 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, including your mortgage payment, property tax and homeowners insurance, by 50% or more.
In most cases it is helpful if your application has supporting factors such as a low debt-to-income ratio, a stable job history or significant savings in the bank. You must also meet the minimum credit score requirement, which is usually 640 for a USDA home loan. Simply put, the cleaner the rest of your application is, the more likely your exception is to be granted.
Use ourUSDA HOME LOAN QUALIFICATION CALCULATORto determine the USDA mortgage you can afford
To apply for a credit exception your application has to be submitted for manual underwriting, which is different than the automated underwriting process that applies to most USDA loan applications. Automated underwriting uses a computer program while manual underwriting requires a human to review your application.
The manual underwriting process takes longer, requires extra documentation and there and there is no guarantee you are approved for the mortgage. You do not learn the status of your application until you go through the process. If you do not meet the credit exception criteria or your application is declined for another reason, you are usually required to wait a year before you are eligible for a USDA home loan.
Because of the additional work and uncertainty involved, some lenders do not accept applicants that require manual underwriting. If you know you need a credit exception to qualify for a USDA home loan it is very important to work with a lender that has extensive manual underwriting experience.
These lenders understand how the process works including the documentation you are required to provide. Before you select a lender, explain your situation, including the status of your bankruptcy, and make sure they know how the manual underwriting process works for a USDA loan.
In closing, it is definitely possible to qualify for a USDA home loan within a year of a Chapter 13 bankruptcy but you need to meet certain qualification guidelines and find the right lender. With some extra effort and the right approach to your application, you can get approved for the mortgage.
You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by mortgage program and location. For example, you can find top-rated lenders in your state that offer USDA home loans.
"Chapter 10, Attachment 10-A, Credit Exceptions." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.
Review our comprehensive USDA Home Loan Guide to learn about program eligibility guidelines, qualification requirements and other useful information including applicant income limits