The first year of a Chapter 13 plan works as the waiting period. A Chapter 13 is a court-approved plan that repays creditors over three to five years, and a trustee, the person the court appoints to collect your payments and pay creditors, keeps the record of every payment. After 12 on-time payments, the next step is permission to take on the mortgage, and your bankruptcy attorney asks for it.
What the lender needs to see
- 12 months of on-time plan payments. HUD requires at least 12 months of the pay-out period to have passed with every required payment made on time. The trustee's payment ledger shows it.
- Written permission. FHA wants written permission from the bankruptcy court to enter into the mortgage. VA and USDA accept approval from the court or the trustee. The approval often sets a maximum price or payment, and the purchase has to stay inside it.
- A letter of explanation. One page on what led to the filing, such as a job loss or medical bills, and what has changed since.
- The plan payment in your ratios. It counts as a monthly debt in your debt-to-income ratio, the share of gross monthly income that goes to the house payment and other debts.
Program by program during a Chapter 13
| Program | Can you buy during the plan | What's required |
|---|---|---|
| FHA | Yes | 12 months of the plan elapsed, every payment on time, written permission from the bankruptcy court |
| VA | Yes | 12 months of satisfactory plan payments, approval from the trustee or court |
| USDA | Yes | 12 months of on-time plan payments, permission from the court or trustee |
| Conventional (Fannie Mae) | No | 2 years after the discharge, or 4 years after a dismissal |
A worked example in Lake County
A married couple earns $7,000 a month together, $3,900 and $3,100. They're 14 months into a 60-month plan at $385 a month, with every payment on time, and they opened a secured card with a $35 minimum after filing. Their middle scores are 598 and 611, and FHA uses the lower one, 598, which clears 580 for 3.5% down.
The debts inside the plan don't count separately, so their monthly debts are $385 plus $35, or $420. Here's a $255,000 single-family home at a 5.75% rate on a 30-year fixed, with taxes at 0.90% of the price and insurance at $235 a month:
| Payment piece | Amount |
|---|---|
| Down payment (3.5%) | $8,925 |
| Total loan with 1.75% upfront MIP | $250,381.31 |
| Principal and interest | $1,461.16 |
| Monthly mortgage insurance (0.55% a year) | $112.78 |
| Property taxes | $191.25 |
| Homeowners insurance | $235.00 |
| Total payment | $2,000.19 |
The house payment is 28.6% of income, and with the $420 of debts the total ratio is 34.6%. Both sit under 31% and 43%, the limits an underwriter starts from when reviewing a loan by hand, so this approval doesn't depend on stretching the ratios. FHA lets the seller pay up to 6% of the price toward closing costs, as much as $15,300 here, which keeps the cash they need close to the $8,925 down payment.
When the plan is discharged
Once the last plan payment is made and the court discharges the case, the $385 drops out of the ratios. For this couple, the total ratio would fall from 34.6% to 29.1% on the same house payment. The discharge also opens Conventional loans 2 years after its date.
Getting ready before the 12th payment
- Put the plan payment on automatic draft. Every one of the 12 has to be on time.
- Ask the trustee for your payment history. A ledger showing each payment date is the first document the lender asks for.
- Talk with your bankruptcy attorney before you sign a contract. The permission request takes time, and the approval may set a price or payment ceiling.
- Keep rent and the new card current. On-time payments since the filing are what the underwriter reads as reestablished credit.
Plug your income, your plan payment and any other debts into the DTI calculator to see the house payment your ratios support. Then call AAA Capital Funding at 888-601-8344 when you're nearing your 12th plan payment. We'll line up the approval so the paperwork for the court or trustee is ready the month you qualify.