How to Qualify for a Mortgage While in a Chapter 13
Chapter 13 bankruptcy is a repayment bankruptcy. Dissimilar from Chapter 7, in which all debt is forgiven, Chapter 13 bankruptcy adjusts and modifies your debt load and creates a repayment plan you must adhere to. Often, a mortgage is not included in this plan. However, qualifying for a mortgage during a Chapter 13 is quite challenging. There are a number of general rules you must be aware of.
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Things You'll Need
- Chapter 13 paperwork and debt repayment plan
- Income documents (paychecks, tax records)
- Current mortgage paperwork (if applicable)
Instructions
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Mortgages During Chapter 13
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Determine whether a sub-prime loan is a better option than remaining in bankruptcy. Following the 2008 credit crisis, many of the profit-driven, sub-prime lenders started to disappear. Massive foreclosures and defaults on sub-prime mortgages have left consumers with few options---all of which are extremely costly.
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Determine your loan-to-value (LTV) ratio. Unlike traditional LTV calculations (where a lender divides your mortgage balance by your property's value), lenders who attempt to secure you a mortgage during Chapter 13 will include all debts in their LTV calculation. Most will not finance a mortgage unless this ratio is under 70%. For example, say your home is worth $300,000. You have a mortgage for $175,000 and a total of $50,000 in Chapter 13 bankruptcy. Your total LTV is 75%, which would be too high.
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Research sub-prime lenders. You will not be able to get financing at any local banks or credit unions. These institutions only finance those with excellent credit. You'll need to look at finance companies, like CitiFinancial and Wells Fargo Financial. Be up-front with all prospective lenders as this will save you time.
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Research "hard money" lenders. These lenders are normally private investors only interested in two things: profit and real estate. The terms on hard money loans are highly unfavorable to the borrower. Interest rates of 18% or higher, with origination fees of 5%, are not uncommon.
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Review all options carefully with a trusted, unbiased adviser, like an attorney or accountant. You will not qualify for anything close to market rates. You must weigh the benefits of remaining with your current situation versus refinancing into a high-cost, high-risk sub-prime loan.
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