Can A Debtor Buy a Home While In Chapter 13 Bankruptcy?
Yes, a debtor is allowed to buy a home even when in an active Chapter 13 (reorganization) bankruptcy. Here is how that can happen. [Can A Debtor Buy A Home After Chapter 7 Bankruptcy? Click here.] [To see a helpful lending matrix, click here.]
How Can Debtor Get Qualified To Buy a Home?
Bankruptcy Debtor Must Be Qualified By The Lender
First, a debtor must actually speak to a prospective lender and get qualified for the desired home loan. Yes, there are loans available for people in an active Chapter 13. However, most loans require that you have been in the 13 case for at least one year AND you have made all payments on time to the Chapter 13 Trustee. FHA loans fall into this category. FHA home lending guidelines concerning home loans in Chapter 13 state the following:
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.
Bankruptcy Debtor’s Request Must Be Approved By The Court
Next, as noted in the guidelines above, the debtor must obtain permission from the bankruptcy court to incur the debt to buy the home. Normally, approval to incur debt is sought by filing a motion with the court that supports the request. A hearing on the motion might not be scheduled for up to 45 days. Therefore, a debtor should not wait until the last minute to obtain approval.
In order to obtain approval, the motion requesting approval has to explain/provide information on the following:
- The terms of the proposed home purchase including:
- purchase price
- amount of the down payment
- source of the down payment
- monthly PITI house payment
- Proof of your current income (provided by last three months pay advices/stubs, etc)
- Your resulting budget if the home loan is approved
- The impact on the current creditors in your Chapter 13 case if the loan is approved
- Will they receive less/more/same money?
As a general rule, if there is no harm to the creditors, the court will approve the request to incur debt to buy a home. This scenario normally occurs when the house payment is close to the current rent payment, i,e., housing costs are about the same and there is not harm to creditors. If, on the other hand, a debtor wants to incur debt where the house payment would be $2,500 and the current rent is $1,250, the debtor can expect an uphill battle for the court’s approval unless there are some other helpful circumstances.
How Long Does Court Loan Approval Take?
A debtor should let their attorney know immediately that they have qualified for a home loan and want to seek approval to buy a home. A debtor can expect that once they have ALL the necessary information to their attorney to analyze, a motion can be normally filed within a week or two. The hearing on the motion might take as much as 45 plus days. Therefore, again, do not delay.
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If we can help you with this or any other bankruptcy issue, please contact us. You know where to find us.