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FHA loan post chapter 13 bankruptcy discharge

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Jimmyfrank72
New Member

FHA loan post chapter 13 bankruptcy discharge

Greetings folks!

my chapter 13 was just dismissed this month and I have been house hunting!  I am really confused about waiting periods post discharge. There seems so be no agreement as to whether there is or is not a two year waiting period after chapter 13 dismissal. I'm looking for someone with experience in the situation that might offer some insight. Thanks!

4 REPLIES 4
Meach7
New Contributor

Re: FHA loan post chapter 13 bankruptcy discharge

You don't have to wait 2 years post discharge on a CH13, it just makes it a less of a risk.

 

Our guidelines show if at least 2 years have passed since discharge and scorecard gives you a risk-classification of 'Accept' then you don't need additional documentation.

 

If less than 2 years have passed they have to be downgraded to a manual review by a DE Underwriter. They'll probably ask for proof of payments for 12 months.

 

 

Message 2 of 5
ShanetheMortgageMan
Super Contributor

Re: FHA loan post chapter 13 bankruptcy discharge

Make sure you are using the correct terminology; a dismissal is the opposite of a discharge.  Dismissal means you failed to complete your Ch 13 BK bankruptcy plan and from my understanding all debts rever back to their original status as if the BK was never filed, with those debts potentially now being owed to the creditors.  Discharge means you successfully completed your Ch 13 BK plan and everything that was discharged in it is no longer owed.  This will eventually be confirmed by underwriting when credit is checked or the BK petition, schedules and discharge paperwork are reviewed but it's better to paint an accurate picture from the beginning.

 

For an FHA loan there is no required waiting period in after a dismissal or discharge, but as @Meach7 pointed out you'll need to meet manual underwriting requirements if it's been discharged within 2 years and may need to meet them if it's dismissed (you'll have the opportunity for automated underwriting to approve you, but there is usually a very low chance of that happening until some time has passed and credit has been re-established). 

 

The 3 main areas that have different qualifying guidelines when having to be manual underwritten vs. automated underwriting are credit, savings/reserves and the debt-to-income (DTI) ratio.

 

Typically underwriters will want to see you've re-established credit with 3 trade lines of at least 12 months of age, traditional credit like revolving debt, installment loans or mortgages are preferred but non-traditional credit such as rental housing payment history, telephone service or utilities are also acceptable... and even non-payroll deducted insurance premiums, payments to child care providing businesses, tuition, or medical debt payments that aren't covered by insurance can also be utilized.  Payment history needs to be free of any late payments on installment or mortgage debt for the past 12 months, no more than two 30-day late payments on installment debt in the past 24 months, and no more than two 60-day late payments on revolving debt in the past 12 months.  In some situations the lack of traditional credit history or if you've decided not to use credit can still be found to be acceptable as long as there aren't any other underwriting concerns.

 

As far as savings is concerned, in addition to the down payment + any closing costs, you'll need to have at least 1 month of the proposed PITI payment in reserves (3 months if it's a 3-4 unit property).

 

Max DTI ratios are 40% housing and 50% total, but if the DTI is over 31/43% then compensating factors are needed such as increased reserves (3 months PITI payments for 1-2 units, or 6 months PITI for 3-4 units), minimal increase in housing expense (lower of $100 or 5%) or residual income requirements must be met (qualifying income minus income taxes, debt payments, estimated maintenance & utilities, job related expenses like child care must meet the table on pages 4-56 and 4-57 of Chapter 4 of the VA Pamphlet 26-7).

 

Many people are able to qualify for FHA mortgages within 2 years of a Ch 13 BK discharge so don't let the additional underwriting requirements dissuade you.

Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 3 of 5
FLLGuy
Frequent Contributor

Re: FHA loan post chapter 13 bankruptcy discharge

@Jimmyfrank72- Welcome to the forums.  My 5yr plan inside CH13 BK was discharged back in July 2021.  I obtained an FHA mortgage loan 8mos afterwards with manual underwritting and required some paper chasing "hence" manual underwritting, there's no waiting period unlike CH7 which does hold a waiting period.  HOWEVER - big however, lenders will see the BK and most likely not give you the lowest rates advertised at least that's what I went through. 




Message 4 of 5
ShanetheMortgageMan
Super Contributor

Re: FHA loan post chapter 13 bankruptcy discharge


@FLLGuy wrote:

@Jimmyfrank72- Welcome to the forums.  My 5yr plan inside CH13 BK was discharged back in July 2021.  I obtained an FHA mortgage loan 8mos afterwards with manual underwritting and required some paper chasing "hence" manual underwritting, there's no waiting period unlike CH7 which does hold a waiting period.  HOWEVER - big however, lenders will see the BK and most likely not give you the lowest rates advertised at least that's what I went through. 


I've seen dozens of lenders FHA rates and none of them have any hit to the interest rate due to having a previous BK, whether a Ch 13 or 7, or having to be manually underwritten... so that really shouldn't be something to worry about IMO.

Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 5 of 5
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