Chapter 13 Bankruptcy Waiting Periods for Home Purchase

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
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Loan Safe Mortgage
Jan 14, 2011
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Chapter 13 bankruptcies can be confusing even to a loan officer when determining when a borrower is eligible. Typically, we see Chapter 7 Bankruptcies which are liquidation bankruptcies that discharge right after the filing. These other types of bankruptcies follow a separate set of rules when it comes to mortgage financing.

There are going to be different requirements for all programs whether it’s Fannie Mae or Freddie Mac, FHA (Ginnie Mae), VA, USDA and even Portfolio financing. We will be talking about those various products and if there is anything else you would like to ask, feel free to jump on this post or give us a call.

What are Chapter 13 Bankruptcies?
In a brief explanation these types of bankruptcies are repayment bankruptcies. Meaning you’re repaying the debt over a period, usually 5 years or whatever is agreed upon in court. Once the borrower has completed the court filing the bankruptcy repayment will begin.

In certain cases, I have seen where bankruptcies are dismissed prior to the discharge, this is where people pull out of the BK and separate time periods will apply for financing. When the payment period is complete (usually 5 years) that is considered the discharge of the bankruptcy. We will be talking about different waiting periods and the difference between dismissal and discharge is very important to remember.

You can also do different tasks within these bankruptcies as we have seen within this forum, for example a Chapter 13 lien strip where you strip the 2nd lien from the home. This is another topic that we won’t be discussing within this thread.

What are the waiting periods on Chapter 13 before you can purchase a new home?
Fannie Mae/Freddie Mac:
2 years from the discharge or 4 years from the dismissal. (If the discharge was 5 years after repayment, an additional 2 year waiting period is required after that for a total of 7 years). If someone dismisses the bankruptcy and does not complete the payment plan the waiting period is 4 years.
*This guideline in my opinion isn’t fair, if someone has agreed to repay debt within a bankruptcy they should be awarded with a shorter waiting period. For example, Chapter 7 has only a 4-year waiting period where someone liquidates their debt to become eligible. In my honest opinion someone completing a chapter 13 is more responsible as they are repaying the debt they acquired*

FHA (Ginnie Mae): If the bankruptcy is not discharged, the courts must provide approval and satisfactory payment history to the bankruptcy trustee is required. For discharged bankruptcies, 12 months is required from the date of the discharge.
*I’ve done many loans where the bankruptcy trustee has approved this, don’t be intimidated when asking for permission from your BK trustee*

VA (Veterans Administration): 12 months with minimum of 12 months paid as agreed to the trustee and court approval.
*This is the easiest out of the bunch, then again it is VA financing which is by far the best out there in my opinion*

Portfolio Financing: 1 day out of bankruptcy discharge is required
*These programs can come with slightly higher premiums however in a competitive market with home values rising it’s still a very attractive product that is sought after*

Hopefully this article breaks down the Chapter 13 bankruptcy and helps you understand the different programs available. This article is dated as of 05/14/2018 and is currently up to date with all program guidelines. Programs may always change in the future to allow a shorter time for qualifying.
 
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