Can I Get a Mortgage While in Chapter 13?

It is possible to obtain a mortgage while actively engaged in a Chapter 13 bankruptcy repayment plan. This involves understanding the legal requirements and demonstrating financial stability to both the bankruptcy court and potential lenders.

Understanding Mortgage Eligibility During Chapter 13

Unlike Chapter 7 bankruptcy, which typically involves asset liquidation, Chapter 13 focuses on a court-approved repayment plan for debts over a period of three to five years. This means debtors often retain their assets, including a home, and can demonstrate a commitment to financial responsibility through their repayment efforts.

Any new significant financial obligation, such as a mortgage, taken on during a Chapter 13 plan is considered post-petition debt and requires careful scrutiny. The bankruptcy court and the Chapter 13 trustee must approve such a debt to ensure it does not jeopardize the existing repayment plan or the debtor’s ability to meet their obligations to creditors. The court confirms the new debt is necessary and affordable, preventing any disruption to the established bankruptcy proceedings, and ensuring the debtor’s financial recovery remains on track.

Key Requirements for Approval

One of the primary requirements for obtaining mortgage approval while in Chapter 13 is demonstrating a consistent history of on-time plan payments to the bankruptcy trustee. Lenders and the court typically look for at least 12 months of satisfactory payments, indicating the debtor’s commitment to their financial obligations.

A debtor must obtain formal approval from the bankruptcy court by filing a “Motion to Incur Debt” before taking on a new mortgage. This legal filing is prepared by the debtor’s attorney and outlines the details of the proposed mortgage, the reason for the new debt, and how it fits within the debtor’s financial plan. The court reviews this motion to ensure that the new mortgage payment will not impair the debtor’s ability to complete their Chapter 13 repayment plan. The court also considers the underlying reason for the mortgage, such as replacing a primary residence or improving an existing home for health or safety reasons.

Lenders will also rigorously assess the debtor’s debt-to-income (DTI) ratio, which includes the Chapter 13 plan payment as part of the total monthly debt obligations. This ratio helps lenders determine if the debtor can realistically afford the new mortgage payment in addition to their existing bankruptcy plan payments and other expenses. Maintaining a responsible credit history after filing for Chapter 13, by avoiding new unauthorized debts and managing existing credit responsibly, also plays a role in demonstrating financial stability to lenders.

The Application and Approval Process

The journey to securing a mortgage while in Chapter 13 begins by identifying lenders who have experience working with bankruptcy cases. During pre-approval, the lender will typically request extensive documentation, including the debtor’s bankruptcy papers, a detailed payment history from the Chapter 13 trustee, and proof of stable income.

Once a lender offers conditional approval for a mortgage, the debtor’s attorney will prepare and file the formal “Motion to Incur Debt” with the bankruptcy court. This motion details the proposed mortgage terms, including the loan amount, interest rate, and repayment schedule, along with a clear explanation of why the new debt is necessary. The motion also includes an updated financial statement to demonstrate the debtor’s capacity to manage the new payment.

After the motion is filed, the bankruptcy trustee and any creditors involved in the case are notified and given an opportunity to object to the proposed mortgage. A court hearing is then scheduled, which can take approximately 30 to 45 days from the filing date, where a judge reviews the motion and considers any objections. Following court approval, the mortgage application proceeds to the underwriting phase, where the lender finalizes their assessment of the loan, leading to the eventual closing of the mortgage.

Considerations for Different Mortgage Types

Different mortgage types offer varying levels of accessibility for individuals in an active Chapter 13 bankruptcy, each with specific requirements. Federal Housing Administration (FHA) loans are often considered one of the more lenient options for Chapter 13 debtors. To qualify for an FHA loan, borrowers generally need to have made at least 12 months of on-time Chapter 13 plan payments and obtain written permission from the bankruptcy court. These loans typically require a minimum credit score of 580 and a down payment as low as 3.5%.

Veterans Affairs (VA) loans, available to eligible service members, veterans, and surviving spouses, also offer flexibility for Chapter 13 borrowers. Similar to FHA loans, VA loans usually require court approval and a history of consistent, on-time Chapter 13 payments, typically for at least 12 months.

Conventional loans, which are not government-backed, are generally the most challenging to obtain while in an active Chapter 13 bankruptcy. Lenders offering conventional loans, often backed by Fannie Mae and Freddie Mac, typically require the Chapter 13 bankruptcy to be discharged before considering a new mortgage application. There are often waiting periods after discharge, which can range from two years after a Chapter 13 discharge to four years after a dismissal, before a borrower can qualify for a conventional loan.

Some portfolio lenders, which are financial institutions that originate and hold their own loans rather than selling them on the secondary market, may offer more flexibility. These lenders have greater discretion in their underwriting criteria and might consider borrowers in Chapter 13 with unique circumstances. However, this increased flexibility often comes with higher interest rates and fees, and may require a more substantial down payment, sometimes ranging from 20% to 30%.