Buying a house after Chapter 13 bankruptcy isn’t always straightforward, but there are more mortgage options available than many borrowers realize. The best option for you will depend on whether your bankruptcy plan is still active or has been discharged, your timeline, your credit score, and the down payment you can make. In this guide we’ll outline what borrowers need to know to buy a home after entering or completing a chapter 13 bankruptcy plan.
Active Chapter 13 Plan
Borrowers who are hoping to secure a mortgage while in an active chapter 13 bankruptcy plan have the option of using an FHA, or if eligible a VA loan.
FHA Requirements
FHA loans are insured by the Federal Housing Authority, so they have more forgiving standards than conventional or Non-QM loan programs. Here are the most important guidelines when considering if an FHA loan is right for you:
- Waiting Period: A borrower must make 12 consecutive payments in their Chapter 13 plan to be eligible
- Must receive approval from bankruptcy trustee
- Credit Score: minimum score of 500
- Down Payment: Minimum of 3.5% with a credit score of 580+ or 10% with a score below 580
- Debt-to-income ratio below 43%
VA Requirements
VA loans are insured by the Veterans Affairs department so they also have flexible standards, but are reserved for veterans, active-duty military, and the spouses of deceased veterans. These are the guidelines to know when weighing your options:
- Waiting Period: A borrower must make 12 consecutive payments in their Chapter 13 plan to eligible
- Must receive approval from bankruptcy trustee
- Credit Score: Minimum score of 500
- Down Payment: No minimum down payment
- Debt-to-income ratio below 55%
After Discharge or Dismissal
FHA Requirements
FHA loans are insured by the Federal Housing Authority, so they have more forgiving standards than conventional or Non-QM loan programs. Here are the most important guidelines when considering if an FHA loan is a good match for you:
- Waiting Period: No waiting period after discharge, 2 years after bankruptcy dismissal
- Credit Score: minimum score of 500
- Must reestablish credit
- Down Payment: Minimum of 3.5% with a score of 580+ or 10% with a score below 580
VA Requirements
VA loans are insured by the Veterans Affairs department so they also have flexible standards, but are reserved for veterans, active-duty military, and the spouses of deceased veterans. These are the guidelines to know before applying for a mortgage:
- Waiting Period: No waiting period after discharge, 2 years after bankruptcy dismissal
- Credit Score: Minimum score of 500
- Must reestablish credit
- Down Payment: No minimum down payment
Conventional Requirements
Conventional loans are not insured by any Federal Agency, the lending standards are set by FNMA and Freddie Mac who buy the loans from mortgage lenders, so they have less flexible standards than FHA or VA loans.
- Waiting Period: 2 years from discharge or 4 years after dismissal (or 2 years in the event of extenuating circumstances)
- Credit Score: Generally 620 or higher
- Must reestablish credit
- Down payment: Minimum of 3% for first time homebuyers or 5% for other borrowers
Conventional Non-QM Requirements
Like conventional loans, Non-Qualified Mortgages are not insured by a Federal Agency but the key difference is that FNMA and Freddie Mac do not set lending standards. This means that Non-QM lenders set their own lending standards and have higher interest rates. The main advantage that non-QM lenders offer is that they have higher loan limits than other programs and allow for alternative income documentation for self-employed borrowers.
No Waiting Period
Our non-QM lenders have programs that can qualify borrowers 1 day after their chapter 13 bankruptcy is discharged. Typically, these programs require borrowers to have a credit score of 620+ and to make a down payment of 25% or higher. However, programs are even available to borrowers with credit scores as low as 550 if they can make a down payment of 40% and have 3 months of mortgage payments in reserve.
One Year Waiting Period
Waiting one year after bankruptcy discharge will generally give borrowers better terms. A minimum credit score of 620 is still required by most lenders but the minimum down payment can be as low as 15% down. Again, borrowers with credit scores as low as 550 can get a non-qualified mortgage if they are able to make a down payment of 35% and have assets in reserve.
Two Year Waiting Period
While borrowers who have waited two years are eligible for FHA loans, if they are making a purchase exceeding the county loan limit or have hard-to-document income, our Non-QM lenders have options available to them.
Earned Equity Program
Another option available to borrowers who have been discharged from a chapter 13 bankruptcy is the Earned Equity Program (EEP). The EEP is a unique program in which a chooses a property then enters a lease-to-own agreement with an FHA eligible government entity that completes the initial purchase and holds the mortgage. Here are the most important facts about the EEP program:
- Purchase price is locked in at the time of closing for the borrower’s eventual purchase
- Waiting Period: No waiting period after discharge
- Credit Score: 580 minimum (some programs go down to 500 if the borrower has assets in reserve)
- Down Payment: Minimum down payment of 3.5%