Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

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 FHAguaranteed 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.

Bankruptcy Seal image attribution
Model T image attribution
 
Financially Speaking™ James Spray, RMLO, CNEFICO 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.

Credit: Use It to Build It (Part 2)

believe-in-yourself_ www.buzzle.com

 

 

 

 

 

 

As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.

The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.

The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.

The Basics

Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.

Credit Score Facts

On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?

Join a Credit Union

Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.

Beginning Anew or New?

Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.

We wish you success!

Image attrbution

Financially Speaking  James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | September 21, 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.

Credit: Use It or Lose It!

 

FICO Score % by population

Credit Atrophy

In neither of the below situations had either credit user been reckless or irresponsible. Neither had run up large balances and there were no late payments. The problem with each was that they simply hadn’t been using credit and had allowed open accounts to age-out from lack of use and be closed by the credit provider.

She Quit Using Credit

In December, my mortgage client’s co-signer’s FICO Scores were all over 830 and given that 850 is the ceiling, we call these great scores! In February, when my client was ready to set a closing, her co-signer had no reported FICO Scores. This means they had fallen below the mortgage score floor of 350.

His Credit Cards Expired

In the early Summer of  2013, my son-in-law began shopping for a home in their new town. His scores were all in the early 800s. By the time it came to schedule a closing in late Summer, his scores had all dropped into the 740 range. What happened? His unused credit lines were closed by the providers. The result was that his usage of available credit increased such that his scores dropped. Rather than having less than 20% of his available credit in use, he now had more than 45% of his available credit in use. He had not increased the amount of credit he was using. He lost open unused credit, which had a negative impact on his overall score as it appeared he was overusing credit.

Retired Credit

“FICO has the primary scoring model for mortgages and most other lending decisions. Its model require an [creditor] update to a credit report within the last 6 months. Your credit file is usually updated monthly for active accounts…” Source.

What to Do?

The card issuers have models which track your usage or lack thereof. The credit provider also incurs ongoing costs such as credit reporting, accounting and audit controls. Be Aware: If you are not using the credit card every six months, or so, the creditor may simply close the account. If the account is not being reported, it cannot be scored. If nothing else, charge something you need to purchase regularly, perhaps a pair of socks. Pay the invoice when due and never pay interest.

Image attribution

Financially Speaking™  James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | August 22, 2014 | May 14, 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.

Dear Daughter: About Building and Responsibly Using Credit

dear_daughter_greeting_card-r67dd158096884317a706729502ac8de0_xvuak_8byvr_512 (2)

Dear Daughter:

In the beginning, select and join a credit union. Use this financial institution as your primary bank. Credit Unions are unique financial institutions. As a member you are an owner, not just a customer.  Your credit union is almost everywhere you are with shared services. Most credit unions offer free checking, free debit card services, free ATM’s, no monthly service fees, low cost auto loans, low interest rate/no fee credit cards and more. Search for one near you, just click here.

Credit Unions are insured by the National Credit Union Association and backed by the Federal Government up to $250,000.00.

 Begin developing a strong relationship by being responsible with your accounts. This will help you establish a solid reputation with your primary credit union.  In many ways, this illustrates your self-respect in the financial world.

·         Balance your checkbook at least monthly; ask a credit union officer to show you how.

·         Do not rely on overdraft protection; set up shares/savings secured in case you need it.

·         Overdraft protection is there to cover math errors only; if you have to use it, pay it off immediately.

·         Do not live on credit – it is but a tool, use it wisely as such.

·         Avoid credit monitoring/score watching services – these are a waste of time and money.

Build emergency savings for emergencies; they happen. Build separate savings for play such as getaways and vacations. You can set up special savings accounts with your credit union.

Building credit requires using credit and using it wisely. Limit your use of credit by using it wisely. Don’t pay interest on disposable goods such as food, gas, clothing, entertainment or vacations.

Once you have your credit union account set up, you may wish to ask a parent or relative with good (740 FICO) to excellent credit (780 FICO) to allow you to inherit their credit reputation. This tool, properly used, can greatly enhance the ability of one with a thin or young credit file to build one’s own credit in a more expedited manner.

Image attribution

Financially Speaking™ James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | July 8, 2013
 
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.

Secured Credit Cards While In A Chapter 13 Bankruptcy

Good Credit Just Ahead Sign

Rebuilding credit is not an overnight process, but it can be done sooner than many think possible. And yes, this can be done while one is making monthly payments in a Chapter 13 Bankruptcy Plan. Done properly, the credit rebuilding process requires a little less than a year to establish good credit. So take a breath, be patient and do it right.

Always keep in mind that just because you can begin rebuilding your credit while in Chapter 13, this does not mean you are outside the jurisdiction of the bankruptcy court. You will need to get authorization to incur new debt, such as for the purchase of a vehicle or a home or the refinance of a home mortgage. Providing you reside in a Bankruptcy Court District, for example the District of Colorado which allows for revesting in the Chapter 13 Plan, it is less of a hassle with the smaller stuff which is really key to rebuilding your credit. More on this below and in other of my blogs.

Before you can begin rebuilding credit, your Chapter 13 Plan must be confirmed by the Court. Discuss the confirmation process with your bankruptcy attorney. You do not have a confirmed Plan just for having filed a Chapter 13 bankruptcy.

The Basics of Building Good Credit Scores

2013 FICO Pie Chart

Given that you want to rebuild your credit, it is essential that the basics of credit scoring be understood. Key to this is the balance of your available credit against revolving credit (credit cards). As discussed in this blog, it is perfect to not have more than 10% of your available credit in use in any given month. It is ok to have up to 20% of your available credit in use, but advisable to pay the balance down to 10%. For example, if one has available credit of $1,000, for best results, one would have no more than $100 (10%) charged during any given month. One would never have more than $200 (20%) charged against the $1,000 available credit limit.

The Chapter 13 Payment

More often than not, I see a late payment made to the Chapter 13 Trustee. This is a deal killer at worst or a delay at best. To learn more of the importance of this payment, you will wish to understand the facts which are discussed in my blog titled: The Chapter 13 Payment.

You Must Use Credit

Rebuilding and maintaining good credit require that you use credit. Yes, to have good credit you must show that you can use it wisely. On this, you will do very well in rebuilding your credit by maintaining a small balance on your credit card(s) and paying minimal payments. You are, in a sense, buying your credit back. Keep in mind, you need to keep a small balance on your credit cards and not pay off the entire amount monthly. Pay on time or pay early, never late. Once you have scores above 740, it is fine to pay off the balance monthly.

Rather than spending your money when you charge something, take a cash advance and put it into your credit union savings account. Read on for more about how and why to use a credit union to help you rebuild your credit and raise your credit scores.

Beware of Ignorance and Prejudice

Unfortunately, there are many folks who have a prejudice against those who have had to file for bankruptcy protection. This includes the folks working in credit unions today. Most credit unions allow one who is in a Chapter 13 bankruptcy repayment plan to obtain a secured credit card. Many, but not all, credit union employees understand this. For example, I called a nearby credit union today and was told by the person responsible for establishing a secured credit card that my client must have been Discharged from Chapter 13 for two years before she could be eligible for a secured credit card. Next I called a nearby branch of this same credit union and spoke with the person responsible for establishing a secured card. He stated that all my client must do is to become a member and make the appropriate deposit. He further explained that since this was to be a secured credit card, that a credit report would not be needed. The fact is whether you think you can or can’t you’re right.

Patience is Key and Being Polite has Rewards

Your success in setting up the secured card with the credit union depends upon which clerk, which location, and what mood they are in. Patience is an integral key to accomplishing your goal. First, open your savings account. In a credit union this is called a Shares Account. Be smart, take time and build a new ‘banking’ relationship while you are building your Shares account. Save at least $1,000 before asking to open a secured credit card. I strongly encourage that you read this blog titled Credit Union Power to learn how these “non-bank’ banks can be superior to traditional banks for those wishing to rebuild credit. Among the ways they are are different from banks in that as a member you become an owner. This is different from just being a customer. On this blog, you may also search for nearby credit unions which you can join. This information is good throughout the U.S.

There are also other secured credit cards available as referenced in this blog. However, very few have zero fee cards with minimal interest such as credit unions. Several of the dry goods stores such as Kohl’s and Victoria’s Secret also offer credit cards to those wishing to rebuild their credit. These, too, have the same rules regarding the usage of credit against the credit limit (10% best – 30% max).

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores. The higher the limit the better!

Home Loan Refinance While in Chapter 13

Providing you have only a first mortgage, you can, in many circumstances, refinance your mortgage to a lower rate and payment while in Chapter 13. For information on how to do this, start with this blog on the subject. One of the conditions is that a second mortgage is not being stripped in the Chapter 13 Plan. In this case, the Plan must be completed prior to a refinance. Once the Chapter 13 Plan has been completed and discharged, it is necessary – in the vast majority of cases – to wait two years to purchase a home or refinance a mortgage. It is much easier to refinance while still in Chapter 13.

Good Credit: Image attribution
Pie Chart: Image attribution
 
Financially Speaking™ James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | April 15, 2012 | Rev. July 16, 2015

 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 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 Denver

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 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.

FICO Score % by population

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.

Courthouse image attribution

Graph image attribution

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.