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.
Although you cannot qualify for a conventional mortgage, you may be eligible for a government-backed loan program such as the FHA, USDA or VA program before your Chapter 13 Bankruptcy is discharged. To get approved for one of these programs, you must 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 and be on-time and current with any loan payments you are required to make. You are also usually required to provide the lender a letter of explanation that outlines the reasons for your bankruptcy, the steps you took to address the issue and why it should not happen again.
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 the monthly payment or qualify for the loan, then they are 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 application.
In addition to obtaining approval from the judge or trustee, you must qualify for the mortgage according to program guidelines for your credit score, debt-to-income ratio, employment history and other factors. Going through a Chapter 13 Bankruptcy can cause your credit score to drop significantly, so you should make sure that you meet the minimum score requirement before you apply for the loan.
The FHA Mortgage Program enables you to qualify 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% of the property purchase price. 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. Although technically VA Loan Program guidelines do not apply a minimum credit score, most lenders require that applicants have a score of at least 620 to qualify.
We recommend that you contact multiple lenders in the table below to determine the mortgage program that is right for you based on your individual credit profile and other factors.
Please note that you are not eligible for a standard conventional mortgage -- which is a loan that is not backed by the government -- until your bankruptcy is discharged. Additionally, lenders impose waiting periods 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 may be shorter if you experienced an extenuating circumstance such as a job loss or illness that contributed to the bankruptcy.
If a government-backed loan does not work for you and you do not want to wait to apply for a mortgage, 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 mortgage with a traditional lender. Many private money lenders do not apply waiting periods, which makes them a viable financing option for borrowers who have experienced negative credit events such as bankruptcy.
Private money lenders offer more flexible qualification requirements for credit-challenged applicants but the big negative is that they charge a significantly higher interest rate and closing costs. You may also be required to make a larger down payment to qualify for the loan.
Review What You Should Know About a Private Money Mortgage
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. Because the loan terms are so expensive, your goal should be to refinance the loan with a standard mortgage as soon as feasible after your bankruptcy is discharged and your credit score has improved.
You can use the FREEandCLEAR Mortgage Lender Directory to search over 3,900 lenders by type and loan program. For example, you can find top-rated lenders that offer FHA, USDA, VA and private money mortgages.
"II.A.4.b.iii. Evaluating Credit History (TOTAL)." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
"Chapter 4.7.b. Bankruptcy Petition Under Chapter 13 of the Bankruptcy Code." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.
"Chapter 10, Attachment 10-A, Chapter 12 OR 13 Bankruptcy (BK)." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.