Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

This post is written for folks currently in a Chapter 13 Plan. It is also helpful for those contemplating filing a Chapter 13 Bankruptcy Reorganization Plan. This post is also helpful for those recently Discharged from Chapter 13. A mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules.

The Chapter 13 Payment

One of the most important things to understand is the importance of on-time Chapter 13 Payments to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your housing (mortgage/rent) payment in underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval for at least a year. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. An experienced mortgage lender can help you check your Chapter 13 payment history in real time.

Mortgage Choices for Chapter 13 Debtors (purchase or refinance)

The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those insured or guaranteed by the Federal government. These mortgages are either: insured by FHA,  guaranteed by VA or the USDA. Each

Any mortgage so long as it’s FHA, VA or USDA.

of these home loans are underwritten with the same guidelines as set forth in the FHA Handbook. How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? From the FHA Handbook:  “A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.*”  Most underwriters will consider the Chapter 13 Trustee’s approval as permission from the court.

Application to Incur New Debt

To get underwriting approval for a Chapter 13 Debtor to refinance the Chapter 13 Trustee (in Colorado) or the Judge must approve your application to incur new debt. Contact your attorney to determine how and when to best proceed, or not. There are situations when it may not be in your best interest to purchase or refinance while in Chapter 13. This is a process which you can only do with the advise and assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt.

Mortgage Refinance After Chapter 13 Discharge?

Yes. One may refinance or purchase within 2 years following the Discharge. BUT, it is easier to get approved for a mortgage while still in Chapter 13. This is because, following Discharge, a manual underwrite is mandated. Few lenders are willing to take the risk of not having the safe harbor provided by Automated Underwriting. Begin reestablishing good credit as soon as your Chapter 13 Plan is confirmed and continue this discipline while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit.

Two years following Discharge, with reestablished credit, one may qualify for a conventional or Qualified Residential Mortgages (QRM) to purchase or refinance a home loan.

Preliminary Requirements for Purchase or Refinance While in Chapter 13

• Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
•  Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
• Minimum middle FICO Score of 620 . Most will need to practice what I’ve previously posted as FICO  101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
• For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
• Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
• The maximum limited-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
• The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
• The maximum Debt to Income Ratio is 45%. This is pushing the envelope. While in Chapter 13, it is mandatory to have Court approval (in Colorado, the Trustee approval suffices) to obtain a mortgage.

There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.

*Reference: FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro |  CO LMO 100008715 | NMLS 257365 | November 1, 2010 – Revised May 2, 2018 | Copyright 2010-2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Preparing for The Appraisal – Selling or Refinancing

Make a good first impression, it helps.

 

 

 

 

 

This post is written primarily for the benefit of the seller and the listing agent as well as the refinance applicant.

• For most homeowners, the real estate appraisal is a key component to selling a home. It allows the business transaction to occur between the seller and buyer, as well as the Realtor or real estate agent and the mortgage lender.
• A state licensed appraiser is responsible for preparing the appraisal for a mortgage loan. The appraiser works for or is contracted by an Appraisal Management Company (AMC) which must also be state licensed.
• To facilitate the appraisal process, it’s beneficial to have the following documents, as applicable and if available, ready for the appraiser:
  • Prepare a list major home improvements (for example, the addition of central air conditioning or updated kitchen) and upgrades including the date and cost of installation as well as permit confirmation where permitting is required by the local government.
  • List any recent property maintenance items such as roof repair/replacement, a new hot water heater, new paint, carpeting, etc. As well as obtain and provide permit documentation when and where a permit is required.
  • Have a copy of a survey or Improvement Location Certificate of the house and land. Again if applicable and readily available. Such may only be required on rural properties.
  • Provide any written property agreements, such as a maintenance agreement for a shared driveway or a common wall agreement(s), etc.
  • List personal property which is to be sold with the home.
  • Provide a copy of the Purchase Agreement on a pending sale.
  • Your Realtor should offer to provide a Comparable Market Analysis (CMA) so you may provide the appraiser with comparable properties and values. Most appraisers value this help. Offer the CMA, do not try to force it on the appraiser.
  • There is nothing in law prohibiting you or your Realtor from presenting a CMA for the appraiser.
• Once the appraiser arrives at the property, there is no need to accompany s/he on the entire site inspection; it is appropriate to be available to answer questions. Feel free to point out any home improvements and provide the supporting documentation of the cost.
• On pets, not everyone loves our furry family members as we do.
  • Four-legged friends should be unobtrusive and well-mannered. Dog bites are to be avoided.
  • Feline friends should have recently cleaned litter boxes as well as neatened dining areas.
  • Spray the carpets, bed coverings and cloth furniture with Fabreze an hour before the appraiser arrives.

Other Considerations

• Accessibility: Make sure that all areas of the home are accessible. Especially make sure access to the attic and crawl space are readily entered. With a locked room, you’ll wish to be certain to provide access for the appraiser so as not to create doubt. Doubt is not helpful for an appraisal.
• Housekeeping: Appraisers see scores of homes a year and will look past most clutter, but they’re human beings too! A good impression can translate into a higher home value. Make up the beds; clean up the kitchen, etc. We found this article to be most helpful in preparing for showings as well as the appraisal. 24 THINGS YOU CAN DO IN 10 MINUTES OR LESS TO MAKE YOUR HOUSE MORE SALEABLE
• Pre-Appraisal/PreListing Infographic
• FHA Financing Eligibility: In the event you wish to have your property eligible for FHA financing, you may wish to: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the affected area.
• Maintenance: Repair minor things like leaky faucets, missing door handles and trim.
• Regulations: Some states, Colorado among them, require that carbon monoxide detectors are installed as a matter of law.
• Sensitivity: Remove sensitive pictures or religious symbols that could prevent an appraiser from taking the required photographs for the report due to privacy concerns.

“Having your house clean does make a difference, even though in theory it should not,” says Mark Ferguson, a real estate professional and property investor in Greeley, Colo. “Appraisers are people, and they are swayed by smells and how a house feels, even if they aren’t conscious of it.” For the complete article, read Do Ultra-Clean Homes Appraise Higher?

Related Information – From a Realtor’s perspective on preparing for a Buyer’s Inspection.

A Division of Real Estate Consumer Advisory: Understanding Appraisals and Appraisers

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |October 11, 2014| March 10, 2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Refinance After Chapter 7

US Customs House – Bankruptcy Court Denver, Colorado

 

You filed a Chapter 7 Bankruptcy and all debts were discharged. You selected not to reaffirm mortgage(s). You have continued paying on your mortgage(s) and now you want the payments reported on your credit report. With one exception that is not going to happen. The fact is that there is but one permanent way to get your mortgage payments reported on the credit reports and that is to refinance your mortgage, when possible. When your bankruptcy was discharged, the Promissory Note portion of the mortgage was legally eliminated. As a result, the mortgage payments will no longer be reported to the credit reporting agencies. Consumers, for obvious reasons, cannot self-report their credit history. For further information as to why the bank or mortgage company doesn’t report your payment, refer to an earlier post I wrote on this subject.

How To Get “Credit History” For Your Mortgage Payments In Order To Refinance

How can you refinance when your present mortgage servicer does not credit report your mortgage payment? There are a couple of ways to do this. The least expensive is for you to obtain proof of your mortgage payments for the past twelve (12) month and provide this to your mortgage broker.  A temporary way to pull the mortgage payments onto the credit reports is via a proprietary system such as Rapid Rescore which is available only to mortgage brokers. Your mortgage payment history can be pulled onto the credit reports for the purpose of mortgage refinance by a mortgage originator in cooperation with a credit reporting service through a credit rescoring system. This is a temporary fix only; a bridge to refinancing once all other factors are in place. The only permanent way to get your credit report to reflect your mortgage payments is to refinance if and when you are eligible.

How To Qualify For Refinance After Chapter 7

• You have been paying your housing expenses [rent or mortgage(s)] on time every month for at least the last 24 months – in rare circumstances, 12 months.
• There have been no 30 day late payments on your mortgage(s) since filing bankruptcy.
• The CAIVRS Authorization system  provides a clean report regarding default on an applicant’s past Federal government loans or guarantees.
• Your current taxable income as well as that of the past two years proves you can pay your mortgage and your debt ratio is acceptable to the lender.
• The taxable income used to qualify for the home loan will continue for a minimum of three years.
• You did not have a junior mortgage prior to filing or it is also current with no late payments or see (*) below.
• No other real estate was included in your bankruptcy or was foreclosed, short sold or surrendered such as investment property or second home within 4 years.
• You have no new bad credit whatsoever and no open credit disputes.
• Your present property value is 10% greater than what you owe on your mortgage(s), i.e., the house can be sold to payoff the mortgage(s), in full, including the cost of sale.
• You have minimum 700 middle FICO® Score (not FAKO scores). To get an idea of your score range use the FICO® Score Simulator (garbage in = garbage out).
• All borrowers must have established new good credit and exhibit that they are managing it very well.
• If the property is a Condominium, it must be FHA approved for FHA home loans or VA approved for VA home loans.

Investor Overlays

Investor overlays are measures lenders take to manage risks. You may need to shop around as, some lenders require 36 months from the Chapter 7 Discharge. Most lenders require higher credit scores, say in the plus 700 range before considering a new loans. The higher the FICO® Score, the better the rate and the lower the cost of the rate will be offered. There is much more to be discussed on the subject of lender overlays

Reaffirmation Is Not Necessary To Refinance

If your mortgage lender/servicer/bank insists that the mortgage must be reaffirmed, you simply need to call on a more seasoned mortgage banker or broker. There are those who will tell you that you must reaffirm the debt. Neither your attorney or I would recommend doing this; nor should you, in any case, do so without seeking the advice of your bankruptcy attorney. Keep in mind that the reaffirmation must be done prior to the Discharge and that is only your bankruptcy judge that can approve a mortgage reaffirmation – my understanding is that many will not.

Readers of this blog most often read Credit Union Power and New Credit During And After Bankruptcy too.

(*) The junior or second mortgage lien was legally stripped from the property in the bankruptcy. Note: this is a very, very rare circumstance. Another option is: the mortgage has been settled, such as via a short payoff in which case a further time-out period may be required.

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Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | January 12, 2012 | Revised October 5, 2014

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.