Buying a house while in Chapter 13 bankruptcy may require a few extra steps, but it is possible — provided that you’re at least 12 months into the repayment plan and obtain written permission from the court. Of course, there are some other requirements you need to meet depending on the specific lender and type of loan program.
According to the American Bankruptcy Institute, 34,367 Chapter 13 bankruptcies were filed in the United States as of March 2022. If you’re one of the thousands of people going through Chapter 13 and feeling discouraged about the possibility of achieving homeownership, don’t worry. There are still financing options available to you.
In this article, we’ll take a look at the types of mortgage loan programs you could qualify for, what their requirements are, and provide tips on improving your chances of approval.
Can you buy a house after Chapter 13?
It’s not impossible to fulfill your dream of owning a house after filing for Chapter 13 bankruptcy. Depending on your financial circumstances and mortgage lenders’ requirements, you may be able to secure a mortgage loan that allows you to cover the cost of a property.
Lenders are typically more lenient on applicants who filed for Chapter 13 bankruptcy than those who filed for Chapter 7 because Chapter 13 filers are making an effort to repay some of their debts. So while financing a home after filing for Chapter 13 bankruptcy may require additional steps, it’s still feasible as long as you meet the lender’s criteria.
What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy, also called a wage earner’s plan or reorganization bankruptcy, allows those with significant financial obligations to create a reorganization plan to pay them off. Unlike a Chapter 7 bankruptcy, debtors in Chapter 13 can keep their assets and home during the process by making payments towards their debts over the course of three to five years.
To be eligible to file a Chapter 13 bankruptcy, here are some requirements you need to meet:
- Your combined total secured and unsecured debts must be less than $2,750,000 as of the date of filing.
- You’re not barred by a prior bankruptcy.
- You’re up to date on tax filings.
- You’re employed and have enough income to cover the required monthly payment.
- You’re an individual and not a business entity.
Visit the United States Courts’ website for more information on Chapter 13 bankruptcy eligibility.
FHA loans with Chapter 13 bankruptcy
FHA loans have less stringent credit requirements and are typically the most attractive option for those looking to get a mortgage while in a Chapter 13 plan.
To qualify for an FHA loan during Chapter 13, you’ll need to have made all of your payments on time and be at least 12 months into the repayment plan. You also must get written permission from the bankruptcy court to take out a mortgage before submitting your FHA loan application.
If you’ve already completed your Chapter 13 repayment plan and received a discharge order, there’s no waiting period for an FHA loan.
FHA mortgage requirements
The Federal Housing Administration (FHA) mortgage allows people with less-than-perfect credit and a small down payment to purchase a home. To qualify for an FHA loan, borrowers will need to meet the following requirements:
- FICO score of at least 580 for a 3.5% down payment
- FICO scores under 580 require a 10% down payment
- A debt-to-income ratio of less than 43%
- The home must be the borrower’s primary residence
- Provide proof of employment and steady income
If you meet these qualifications, you can start comparing your options for FHA loans using the tool below.
VA and USDA loans with Chapter 13 bankruptcy
VA (Veteran Affairs) and USDA (United States Department of Agriculture) loans are also government-backed loans like FHA loans. This means they also have looser requirements for those with Chapter 13 bankruptcy.
To qualify for a VA or USDA loan, you must:
- be at least 12 months into your Chapter 13 repayment plan and be current on your monthly payments
- get written approval from the bankruptcy court or bankruptcy attorney before applying for the loan
- meet the specific loan program guidelines
VA loans requirements
You can qualify for a VA loan by meeting one or more of the requirements below.
- Served at least 90 consecutive days of active service during wartime
- Served 181 days of active service during peacetime
- Served six years in the National Guard or Reserves, or served 90 days (at least 30 of them consecutively) under Title 32 orders
- Be the spouse of a service member who passed away while on duty or due to a service-related disability
Note that VA loan credit score requirements may vary by lender. And though VA loans technically don’t have a minimum credit score requirement, individual lenders may prefer to see credit scores above a certain number.
To get a better idea of what terms you may qualify for with your credit score, take a look at the VA loans below.
USDA loans requirements
To qualify for a USDA loan, you need to:
- be a U.S. citizen or a legal permanent resident
- have a credit score of at least 640
- have stable and dependable income
- have an adjusted household income equal to or less than 115% of the area’s median income
- use the loan to purchase a property that serves as your primary residence and is located in a qualified rural area
Provided you meet those lending guidelines, you can start looking for a USDA loan today. Use the tool below to compare your available options.
Conventional loans with Chapter 13 bankruptcy
Qualifying for conventional loans after Chapter 13 is tougher than getting approved for government-backed loans since Fannie Mae and Freddie Mac — the two agencies that set conforming loan rules — are much stricter. This is why we recommend applying with a mortgage lender (or lenders) who offers USDA, FHA, and VA loans.
Conventional lenders generally will not allow borrowers to apply while working through Chapter 13. And even once the bankruptcy is discharged (after you complete the three or five-year repayment plan), you’ll still need to face a two-year waiting period before applying for conventional financing.
Tips for qualifying for a mortgage with Chapter 13
Qualifying for a mortgage with Chapter 13 may seem daunting, but it’s doable with the right strategies and planning. To increase your chances of qualifying for a mortgage after filing for bankruptcy, Alex Capozzolo — licensed realtor in California and co-founder of SD House Guys — says you should:
- Stay current on your payments. One of the most important things to do when trying to qualify for a mortgage under Chapter 13 is to stay current on all payments. This includes your mortgage, car loan, student loans, and any other debt you may have.
- Have available funds. Having funds available to make a down payment may be beneficial when trying to qualify for a mortgage with Chapter 13. Having even just a small amount saved up can help demonstrate that you’re financially responsible and able to manage your money.
- Find an experienced bankruptcy attorney. Working with an experienced bankruptcy attorney can be beneficial when trying to qualify for a mortgage under Chapter 13. Your attorney will be able to provide you with guidance on the best path to take to ensure your application is accepted.
A good credit score will also increase your chances of being approved for a mortgage. To know where you stand in terms of your credit health, get a free copy of your credit report from each of the three major credit bureaus from AnnualCreditReport.com.
If you see an error on your credit report that may be dragging your credit score down, file a dispute with the credit bureau immediately to correct it. Or, if you don’t want to do it alone, you can hire a credit repair company to dispute the errors on your behalf.
Can you finance while in Chapter 13?
Yes, obtaining financing or opening new lines of credit while in Chapter 13 bankruptcy is possible. But you’ll typically need prior approval from the bankruptcy court and be current on your plan payments.
Depending on the lender or the financial institution you work with, there might also be other requirements. Since being in Chapter 13 makes borrowing money much more complex, consult a bankruptcy lawyer before making any moves.
Does your credit score go up while in Chapter 13?
A bankruptcy filing can initially negatively impact your FICO score and will stay on your credit report for seven years. However, a 17-year study by the Consumer Financial Protection Bureau discovered that the median credit scores of those who filed a Chapter 13 bankruptcy from 2001 to 2018 increased steadily from year to year.
This boost in their credit scores is likely because bankruptcy helps consumers recover from financial shocks and reduce their debt-to-income ratio as they gradually repay the creditors.
How can you end your Chapter 13 early?
There are only two ways to end your Chapter 13 bankruptcy early: You either pay off all of your debts in full or qualify for a hardship discharge. The latter option involves showing significant changes in your circumstances that make it impossible for you to continue making payments according to the terms set by the court.
Note that even if the court grants your motion for a hardship discharge, only unsecured non-priority debts, like old tax penalties, will get wiped out. A hardship discharge typically won’t eliminate debts like student loans.
Can you rebuild credit while in Chapter 13?
Yes, it’s possible to rebuild credit while in Chapter 13 bankruptcy. For example, you could establish a consistent payment history and improve your creditworthiness by getting a credit builder card or loan.
However, you may need to obtain permission from the court to open any new lines of credit to boost your credit score. So be sure to consult your bankruptcy lawyer before taking any steps.
- It’s possible to buy a house after filing for Chapter 13 bankruptcy, provided you meet specific criteria set by lenders.
- A Chapter 13 bankruptcy is also called a wage earner’s plan or reorganization bankruptcy. This plan allows those with significant financial obligations to create a repayment plan to pay back their debt over three to five years.
- FHA loans are generally the most attractive option for applicants looking for mortgages while in their Chapter 13 plans due to their lenient requirements.
- VA and USDA loans are government-backed options that may be available depending on your circumstances. However, they also have certain requirements that must be met, such as being 12 months into your repayment plan and proof of steady income.
- Conventional loan financing is typically not an option during Chapter 13 since they tend to be more strict when it comes to borrowers who’ve filed for bankruptcy.
Build your credit for a better mortgage loan
Thankfully, getting a mortgage is still possible after filing for Chapter 13 bankruptcy — though you may have to jump through some extra hoops. And don’t despair if your credit score has taken a hit after Chapter 13. There are many ways to boost your credit so you can qualify for a loan with more favorable terms in the future.
A great way to do this is by applying for a credit builder loan or secured credit card. With these lines of credit, you can slowly improve your creditworthiness by making consistent payments reported to the credit bureaus.
View Article Sources
- Chapter 13 – Bankruptcy Basics — U.S. Courts
- Housing statistics — American Bankruptcy Institute
- VA Busts Four Home Loan Myths That Hurt Veteran Homebuyers — U.S. Department of Veterans Affairs
- Chapter 13 Bankruptcy: Everything You Need To Know — SuperMoney
- What Is the Average Credit Score After a Chapter 13 Discharge? — SuperMoney
- VA vs. FHA vs. Conventional Loans — SuperMoney
- Can You Refinance Your Home After Bankruptcy? — SuperMoney
- Can You Get A Loan After Filing for Bankruptcy? — SuperMoney
- Does Bankruptcy Clear Tax Debt? Everything You Need to Know — SuperMoney
- Debt Settlement Vs Bankruptcy – Which is Best for You? — SuperMoney
- Bankruptcy: The Ultimate Guide — SuperMoney
- Debt Help: Definitive Guide on Making a Working Debt Plan — SuperMoney
- Best Debt Relief Companies — SuperMoney