Mortgage Requirements For Borrowers In Chapter 13

If you are in a Chapter 13 bankruptcy, you can still qualify for a refinance or for a purchase money mortgage. You can refinance for either a lower rate or for cash out. The cash out can be used for home improvements or to pay off your debts - including your entire bankruptcy. But, loan approvals in Chapter 13 are subject to more requirements than usual. Please carefully review everything below.

If you have questions about any of these items, please do not hesitate to reach out to our mortgage and bankruptcy specialists at [email protected].

12 months of on-time BANKRUPTCY payments

You need to prove that you have made your last 12 months of payments to the bankruptcy court trustee on time, without missing any of them. You can get your payment history from your trustee or from this website: NDC.org. If you missed any of your payments, you will not be able to qualify for a new mortgage while you are in a Chapter 13 bankruptcy – with one exception (see below).

12 months of on-time MORTGAGE payments

You need to prove that your last 12 mortgage payments have been on time as well. Your credit report may not be accurate if you missed mortgage payments prior to your bankruptcy filing. You can still qualify for a refinance if you missed payments prior to 12 months ago, but you cannot have missed any payments over the last 12 months. If you do not have a mortgage and are looking to qualify for a purchase money mortgage, we will need to see your 12-month rental history.

Estimated debt pay-off

Please estimate your total debt pay-off. This is your total mortgage balance (principal owed and any “arrearages” or missed payments still owed) plus all consumer debts that are within your bankruptcy. This does not usually apply if you are looking for a purchase money mortgage.

Sufficient income

We need to verify that you have sufficient income to qualify for a refinance. We can help you with this once you have established that you have the required 12-month payment histories as per above. 

Equity in your home

You will need to have at least a 20% equity cushion in your home after the refinance closes. This means that your current mortgage plus the cash out necessary to pay off your debts and/or do home improvements and cover closing costs cannot exceed 80% of the value of your home. We can help you estimate the value of your home, once you have established that you have the required 12-month payment history, as per above. If you are looking for a purchase money mortgage, you will only need to have a 3.5% down payment.

Credit

We will need to run your credit to see your credit scores. The minimum credit score is typically 580, but we can make exceptions for lower scores if there are compensating factors, such as substantial equity, very low debt ratios and/or strong proof that your bankruptcy and credit issues were a result of a one-time event that was out of your control and that will not repeat.

Cash reserves

v=spf1 +a +mx +ip4:198.1.65.128 ip4:10.4.0.53 ?allWe understand that cash is tight, or you would not be in bankruptcy. But FHA guidelines require that you have at least one housing payment as “cash reserves” at the close of escrow – and you cannot use the “cash out” from your mortgage to establish cash reserves. There are, however, workarounds that we can discuss once we know that you have the required 12-month payment history.

Court approval

Once we know that you have met the above guidelines, you will need to work with your attorney or trustee to get the court’s approval of your refinance. We will provide estimated loan terms and assist with this process.

The Exception

The only exception to requirements #1 - #6 is significant equity in your home. If you have enough equity to pay off all of the debts in your bankruptcy and to cover closing costs, with a 35% to 40% equity cushion remaining, we can still help you refinance in most cases. 

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