Conforming Loan With Chapter 13 Bankruptcy
Its much tougher to get a conforming loan after 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 theres a waiting period:
- Two years after Chapter 13 discharge date
- Four years after Chapter 13 dismissal date
Remember, discharge happens after you complete the 3 or 5year repayment plan.
So altogether it could take up to 7 years after filing for Chapter 13 before you can get a conventional loan.
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 4 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.
It may be easier to buy a house after Chapter 13 discharge if your bankruptcy was caused by extenuating circumstances.
Extenuating circumstances are typically onetime events outside your control that have a serious negative impact on your finances.
Examples include a severe illness or disability, a company layoff, or the death of the primary wageearner.
Can I Buy A House While In Chapter 13 Bankruptcy In Athens Ga
Bankruptcy, Chapter 13 | January 18, 2021 | Lee Paulk Morgan
Right now, this question is more pressing than ever. As of December 30, 2020, mortgage rates were at all-time lows. These low rates will probably not last. If the coronavirus pandemic fades in 2021 and more people buy houses, rates will go up. If the coronavirus pandemic extends into 2021 and Congress passes more stimulus measures, the resulting pressure on Treasury notes will drive up mortgage rates. This all complicates the question, Can I buy a house while in Chapter 13 bankruptcy?
This question is really two questions. First, there is the legal possibility of buying a house in Chapter 13 bankruptcy. Second, there are obvious practical considerations. A Georgia bankruptcy lawyer address both these sub-questions. An attorney advocates for you in what is usually a tough fight with creditors. Furthermore, a Georgia bankruptcy lawyer typically has professional associations with bankers.
Chapter 7 Versus Chapter 13 Bankruptcy
Real estate is treated very differently if it is part of a Chapter 13 versus Chapter 7 bankruptcy proceeding. Homes in Chapter 13 bankruptcy remain in the control of the seller. To purchase one, you would negotiate with the owner directly. There is a requirement for bankruptcy court approval of your offer. This is a check to make sure that creditors are being protected and that the seller isnt receiving any proceeds. Chapter 7 bankruptcies are very different. All of the owners assets are transferred to the possession of the bankruptcy trustee, who is appointed by the court. The trustee is responsible for the sale and disposition of all assets and the owner is no longer involved in the negotiations for the sale of their home. Well talk more about buying homes out of Chapter 7, as that is where the process differs wildly from a regular transaction.
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Getting Permission To Sell Or Transfer Property
Generally, you cannot sell, refinance, gift or dispose of any of your property during your Chapter 13 case without the approval of the Bankruptcy Judge. This includes your house, car, appliances, furniture, jewelry, etc. Whether the property was acquired before or after you filed your case does not matter. Whether you paid for the property or the Trustee is making payments on the property does not matter. If you want to sell any property, then you MUST contact your attorney to determine the appropriate course of action. Most sales require advance permission of the Bankruptcy Judge, and your attorney must file the appropriate motions to receive the Judges approval before the sale can proceed. Talk to your attorney before you sell any property.
Most likely, your attorney will need to file a legal pleading with the Bankruptcy Court which will outline what you want to sell, who you are selling it to , the sales price, and any proposed closing date. Additionally, if you are selling a house or a car, then information on how you found the seller will be helpful for your attorney. For example, a home is typically listing with a realtor.
The Chapter 13 Discharge
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the chapter 13 discharge.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor: certifies that all domestic support obligations that came due prior to making such certification have been paid has not received a discharge in a prior case filed within a certain time frame and has completed an approved course in financial management . 11 U.S.C. § 1328. The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption. 11 U.S.C. § 1328.
The discharge releases the debtor from all debts provided for by the plan or disallowed , with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
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Repay Your Mortgage Arrears Over Time
In many ways, your Chapter 13 bankruptcy repayment plan is like a plan you might negotiate with the mortgage servicer. Either way, you have an opportunity to get your mortgage current over time. Of course, if the only reason you are filing Chapter 13 is to get time to get your mortgage current, and you could get a similar deal from the servicer, you’ll be better off not filing for bankruptcy, at least as far as your credit score is concerned.
EXAMPLE: Freddie owes $3,600 in missed mortgage payments. He receives a notice of default that gives him a month to pay up or lose his house. His mortgage servicer refuses to work with him because of a previous notice of defaultthe lender doesn’t think he’s a good credit risk.
Freddie had fallen behind on his mortgage because he was laid off, but now he’s working again. If he files for Chapter 13 bankruptcy and gives up one of the cars he’s making payments on, he’ll be able to afford a repayment plan, under which he will stay current on his mortgage and also make up the arrears over three years. He proposes to pay down the arrears at the rate of $120 a month: $100 for the debt plus $20 a month for the trustee’s fee.
Part of the problem in workouts with a mortgage servicer is that servicers typically add on a wide variety of fees and costs, which make it difficult for the homeowner to reinstate the mortgage. In Chapter 13 bankruptcy, you can challenge the validity of these fees and costs on a variety of grounds.
How To Reestablish Credit After Bankruptcy
Once the bankruptcy process is over, reestablishing and maintaining is key to your financial health. Lenders will be looking for zero delinquencies postbankruptcy.
While you work to build new credit, dont go overboard opening an extensive number of accounts, as this will work against you, advises Carey. Usually, opening just a couple of revolving credit lines and paying them in a timely manner over the course of 12 months helps to increase credit scores back to an acceptable level.
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What Can You Buy During Chapter 13 Bankruptcy
If you’re in a Chapter 13 bankruptcy, you’re in it for the long haul. Chapter 13 cases last three to five years, and during that time, the court and the Chapter 13 trustee will tightly control your budget. You can spend your money on necessary items, but frivolities are hard to come by, and if you want to finance a purchase, you need court permission.
Getting The Down Payment
In addition, any down payment or cash closing costs requirement can be tricky. If you are not selling a home to get the funds for a down payment, the source of the money will be heavily scrutinized by your bankruptcy trustee. If you saved this amount while within Chapter 13, the trustee may decide that you have sufficient income to increase your monthly Chapter 13 payments.
However, getting this money as a gift from family may be an option. Remember, though, a personal loan is a form of credit that still needs to be approved by the bankruptcy trustee even if it comes from your parents or another family member. Because of these limitations, many people prefer to wait to purchase a home until after their Chapter 13 has been discharged.
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Turn A Second Or Third Mortgage Into An Unsecured Debt
If you’re like many homeowners, your home is encumbered with a first mortgage, a second mortgage , and even a third mortgage . Most likely, the holder of the first mortgage is pushing the foreclosure. But if you have fallen behind on your first mortgage, you are probably behind on your second and third mortgages as well. Would it help you keep your house if you no longer had to pay the second or third mortgage? You know the answer: Lightening your overall mortgage debt load could only help you meet your first mortgage obligation.
One of the great features of Chapter 13 bankruptcy is that in many bankruptcy courts you can get rid of all mortgages that aren’t secured by your home’s value. Let’s say that you have a first mortgage of $300,000, a second mortgage of $75,000, and $50,000 out on a home equity line of credit. Presumably, the value of your home when you took on these debts was at least equal to the total value of the mortgages, or $425,000. But if the house is now worth less than $300,000, as a practical matter the house no longer secures the second and third mortgages. That is, if the house were sold, there would be nothing left for the second or third mortgage holders.
This also means that under your Chapter 13 plan you won’t have to make up payments missed on your second or third mortgages. And because you’re no longer making current payments on the second or third mortgage, the total amount you pay each month will be reduced by a considerable amount.
Fha Loans After Chapter 7 Bankruptcy
Fortunately, you can qualify for an FHA loan following Chapter 7. But be prepared to wait a while before youll get approved.
Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy, says Jeremiah Heck, a debt and bankruptcy attorney.
Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.
But in some cases, the mortgage lender may require additional time.
For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible, adds Heck.
In addition to the waiting period, youll need to meet other FHA loan requirements. These typically include:
- Down payment of 3.5% or more
- Debttoincome ratio below 50%
- Steady income and employment
- Income source expected to continue for 3 years
Avoiding any new debts after bankruptcy for example, a car loan or personal loan can help your chances of qualifying for an FHA mortgage once the 2year waiting period is over.
Requirements for other mortgage loan types
An FHA loan isnt the only loan type that can get you on the fast track to homeownership. VA loans also have a minimum waiting period of two years from the date of your Chapter 7 discharge.
To qualify for a VA loan, you need to be an eligible veteran, service member, or member of an associated group .
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Do You Qualify For A Mortgage
Having a Chapter 13 bankruptcy in your credit history shouldnt stop you from getting a mortgage.
You might even be able to buy a home during Chapter 13 if youre in good standing with your repayment plan and you qualify for the mortgage.
If youve 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.
Open A Line Of Credit
Once you feel confident with your budgeting and savings, consider opening a credit card. Be sure to pay it down each month, though. That way, youll build back up your credit without building back up your debt. A secured credit card is another option. It is backed by the money you have in savings, so if for some reason you fail to pay, the creditor will draw from the savings account and reduce your credit limit.
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Making An Offer On A Home In Chapter 7 Bankruptcy
A trustee often lists real estate in bankruptcy on the open market. If you decide to place an offer on such a property, there is usually a specific contract required by the bankruptcy court that has similarities to a typical real estate contract, but contains many bankruptcy-specific terms.
What Type Of Mortgage Can You Get After Bankruptcy
Its technically possible to get any type of mortgage loan after a bankruptcy. There are no rules in place that permanently exclude you from getting a certain type of loan because youve gone through a bankruptcy. As long as you meet the waiting period discussed above, youre free to apply. But you can qualify for some types of mortgage loans much easier than others.
An FHA loan could be a great option if you have a bankruptcy on your record. FHA waiting periods are shorter than other types of loans. If you have a Chapter 13 bankruptcy, theres no waiting period at all after a court dismisses or discharges you. FHA loans also have looser requirements compared to other types of government-backed loans.
One of the major benefits of getting an FHA loan after a bankruptcy is its lower credit requirements. Even after a court dismisses or discharges your bankruptcy, it will still negatively influence your credit score. A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will stick around for 7 years.
During this time, your credit score will be much lower than before your bankruptcy. You can buy a home with an FHA loan with a credit score as low as 580 points. You may even qualify for a loan with a score as low as 500 points if you have a down payment of at least 10%. However, at Rocket Mortgage®, the minimum credit score is 580.
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Chapter 13 Manual Underwriting Mortgage Guidelines
VA and FHA Manual Underwriting Mortgage Guidelines are similar and are almost the same.
Here are the Chapter 13 Manual Underwriting Mortgage Guidelines On VA and FHA Loans:
- Timely payments during Chapter 13 Bankruptcy Repayment Period to the Trustee
- Late payments during Chapter 13 Bankruptcy is very frowned upon but is not always a deal killer with extenuating circumstances
- All manual underwriting require timely payments in the past 24 months
- Manual Underwriting requires verification of rent
- Gustan Cho Associates will accept a living-rent-free-with-family letter for borrowers who do not have rental verification
- Low Payment Shock is considered a compensating factor on manual underwriting
The debt to income ratio is dependent on the number of compensating factors.
What Does That Mean For You
If youâre current with your mortgage payments â¡ï¸ everything will stay basically the same.
Youâll continue to make your mortgage payments until the house is paid off. Of course, there are some legal nuances, like the discharge of your personal liability on the home loan, and how it protects you in the event you lose your home down the road, but the important takeaway here is this:
If you have enough income to pay your mortgage lender, you can keep your home even after filing Chapter 7 bankruptcy.
Itâs a little more complicated if your home is worth more than what you owe on your mortgage. In that case, you may have to deal with the bankruptcy trustee. More on that below.
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