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Can You Get a Mortgage in Chapter 13 Bankruptcy?

Can you get a mortgage in Chapter 13 Bankruptcy?

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

You should be able to qualify for a mortgage when you are in Chapter 13 bankruptcy but it may require extra effort.  The first step is understanding the borrower eligibility requirements and the mortgage programs that are available to borrowers who are taking part in a court-approved bankruptcy plan.  You may be eligible for a government-backed loan such as an FHA, USDA or VA mortgage before a Chapter 13 Bankruptcy is discharged if you meet the following requirements: 

You are at least twelve months into the bankruptcy plan;

You have made all of your required debt payments on-time; and,

The bankruptcy judge or trustee provides written permission for you to enter into the mortgage

In short, you must be at least a year into your bankruptcy program, be on-time and current with any monthly loan payments you are required to make and it is also important to work closely with the judge or trustee who is overseeing your plan.  If the judge or trustee does not think you can handle a mortgage payment or qualify for the loan, then he or she is unlikely to provide the permission you need to be eligible for the mortgage.  If you have satisfied the first two criteria and are successfully completing the terms of your bankruptcy plan then the judge is likely to support your loan application. 

In addition, you must also qualify for the mortgage according to program guidelines for your credit score, debt-to-income ratio, employment history and other factors.  The credit score requirement may be especially challenging for applicants completing a Chapter 13 Bankruptcy plan so borrowers should focus on this point.  We provide comprehensive reviews of the FHA, USDA and VA mortgage programs, including the minimum credit score requirement, for you to review.

Based on the information you provided, an FHA or USDA loan may be the right programs for you. The FHA Mortgage Program enables you to buy a home with a credit score as low as 500 if you make a down payment of at least 10% or a credit score of 580 if you make a down payment between 3.5% and 10%.  The USDA Home Loan Program enables you to buy a property located in a designated rural area with no money down and a credit score as low as 640.

We always recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking MORTGAGE RATES We advise you to contact at least four lenders as qualification guidelines vary. Plus, shopping multiple lenders is the best way to save money on your mortgage

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Please note that borrowers are not eligible for conventional mortgage programs -- which are not backed by the government -- until their bankruptcy is discharged.  Additionally, lenders impose waiting periods from the date of discharge following derogatory credit events such as a bankruptcy, default or foreclosure before you can apply for a conventional loan.  The length of the waiting period varies depending on the type of event. For example, for a Chapter 13 Bankruptcy the waiting period is two years following the date of discharge for a conventional loan. The waiting periods are shorter if you experienced an extenuating circumstance such as a job loss or illness that contributed to the derogatory credit issue.  We provide a comprehensive overview of the mortgage waiting periods following negative credit events for you to review. 

If a government-backed loan does not work for you and you do not want to wait following your bankruptcy, you may want to consider a private money lender.  In short, private money lenders, also known as hard money lenders, are a financing option when you cannot qualify for a traditional mortgage.  They offer more flexible qualification requirements for credit-challenged borrowers but the big negative is that they charge a significantly higher interest rate and closing costs.  Many private money lenders do not apply waiting periods, which makes them a viable financing option for borrowers who have experienced negative credit events.  If you decide to go the private money route, because the loan terms are so expensive, your goal should be to refinance the loan with a standard mortgage as soon as possible after your bankruptcy is discharged and your credit score has improved.

We explain What You Should Know About a Private Money Mortgage on FREEandCLEAR. If you apply for a loan with a private money lender be sure to fully understand the higher mortgage rate, costs and fees, including any pre-payment penalty, charged by the lender.

Use our FREEandCLEAR Lender Directory to search for private money lenders

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Current Mortgage Rates as of March 23, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

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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