Did you know that a borrower does not necessarily need to have their Chapter 13 Bankruptcy discharged to qualify for a loan? The Federal Housing Administration (FHA) has specific guidelines in place that allow individuals with an open Chapter 13 bankruptcy to proceed with financing under certain conditions.

Minimum 12 Months of Regular Payments

To be eligible for financing, borrowers must have made a minimum of 12 full months of regular payments to the court as agreed under the payment agreement. This demonstrates a commitment to meeting financial obligations and shows the FHA that the borrower is capable of managing their finances responsibly.

No Late Payments Allowed

In addition to the minimum payment requirement, borrowers must have a clean payment history with no late payments. This is a crucial factor in determining creditworthiness and shows the FHA that the borrower has been consistently meeting their obligations.

Manual Underwriting for Non-Discharged Bankruptcy

If the Chapter 13 bankruptcy has not been discharged for at least 2 years, manual underwriting is required. Manual underwriting involves a more detailed assessment of the borrower’s financial situation, including income, assets, and credit history. Additionally, reserves will be required to ensure the borrower has sufficient funds to cover future mortgage payments.

Written Permission from the Court

Before entering into a mortgage transaction, borrowers must obtain written permission from the court overseeing their bankruptcy case. This permission serves as confirmation that the court acknowledges the borrower’s intent to take on new financial obligations and allows them to proceed with the loan application.

No Modifications to the Payment Plan

Once the payment plan has been established, no modifications are allowed due to continued hardship or other reasons. This requirement ensures that the borrower remains committed to fulfilling their obligations as agreed upon with the court.

Contrary to popular belief, borrowers with an open Chapter 13 bankruptcy can still qualify for a loan under FHA guidelines. By meeting the minimum payment requirement, maintaining a clean payment history, obtaining written permission from the court, and adhering to the payment plan without modifications, borrowers can demonstrate their ability to responsibly manage their finances. It is important to note that manual underwriting may be required for non-discharged bankruptcies, and reserves will be necessary to secure the loan. If you find yourself in this situation, consult with one of our knowledgeable mortgage professionals who can guide you through the process and help you navigate the FHA guidelines.

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