Chapter 13 Bankruptcy Refinance And Purchase Guidelines

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
San Diego, California
As home loans continue to become more difficult to qualify for, having a bankruptcy can possibly prevent you from obtaining a new home loan. Many industry experts are unaware of what the requirements are when a potential client had a Chapter 13 BK. This post is to help people understand what options they have post bankruptcy.

First let's explain the differences of a Chapter 7, 11 & 13 bankruptcy:
Chapter 7 BK - This is a liquidation bankruptcy, meaning all of the revolving debt included in the bankruptcy is wiped clean. Everything with this type of bankruptcy is done somewhat instantly.

Chapter 11 BK - Mainly used for business purposes and is not seen much in the real estate lending world.

Chapter 13 BK - This type of bankruptcy is used for multiple purposes like lien stripping but ultimately is for people that don't qualify for a Chapter 7 bankruptcy for one of many reasons, including making too much money for a Chapter 7. In a Chapter 13 you are repaying the debt that you owe over a period of 5 years (typically).

When it comes to home loans, it's very easy to understand that when a Chapter 7 bankruptcy is discharged there are certain timeframes before being eligible for either a refinance or purchase. With conventional loans on average you have to wait a minimum of 4 years before being eligible. FHA loans only require 2 years post bankruptcy and jumbo loans are the most strict with some investors requiring 10 years post the economic event before allowing financing.

Chapter 13 bankruptcies work much differently because there is what's called a dismissal as well as a discharge. Now what does that mean? A dismissal is when the bankruptcy is filed but not complete. In some cases the person may not have completed the entire payment plan or stopped the bankruptcy after filing. A discharge is when the person has completed the payment plan (typically after 5 years).

What are the timeframes before being eligible for a new home loan?
Portfolio (not hard money): We have portfolio loan products that will allow financing immediately after a bankruptcy is discharged, the interest rates are not as favorable as conventional or FHA however they are much more attractive than hard money. Our program for the day after bankruptcy starts at 15% down and once you're 2 years past the discharge we open up our 10% down program.

FHA: If the bankruptcy is not discharged (borrower still in repayment or dismissed) the courts must provide approval and satisfactory 12 month pay history to the bankruptcy trustee is required. In most cases the bankruptcy trustee will agree and allow you the ability to refinance or purchase a new home. For discharged bankruptcies (when a borrower completes the payment plan) 12 months are required from the date of the discharge. FHA seems to have a little bit more liberal guideline towards Chapter 13 than conventional which I will explain below.

Conventional/Fannie/Freddie: Now here is where it gets interesting and in my eyes isn't fair to future homebuyers or homeowners looking to refinance. Chapter 13 requires 2 years from the discharge date or 4 years from the dismissal. Let's put these facts together: Let's say a person files CH13 bankruptcy, completes the repayment period of 5 years and then the discharge is complete. They now have to wait an additional 2 years before being eligible for a new home loan! That's a 7 year waiting period which is exactly the same as a foreclosure. If the bankruptcy is dismissed, let's say 4 years into the bankruptcy the person decides they no longer want to be a part of the bankruptcy or don't supply documentation that the courts may require and the courts automatically dismiss the BK. Now that person must wait 4 years from that dismissal date now making it 8 years before they can obtain a traditional, conventional loan.

There have been many guideline updates since I have been involved in the industry and this one is one that needs to be reformed. If you're reading this and are deciding which bankruptcy to file, take into consideration what your future goals of being a homeowner are. It may change the direction you end up taking and rather than a Chapter 13 you file a Chapter 7.

If you have any questions about this please don't hesitate to post a comment below or reach out to us directly at 800-779-4547 or e-mail at [email protected].
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