Cash-Out Refinance To Buy Out Chapter 13 Bankruptcy

This guide covers the mortgage guidelines on cash-out refinance to buy out Chapter 13 Bankruptcy. FHA and VA loans are the only two mortgage loan programs that allow home mortgage loans during an active Chapter 13 Bankruptcy repayment plan. Homeowners with home equity can consider buying out the Chapter 13 Bankruptcy.

The bankruptcy does not have to get discharged for you to qualify for an FHA or VA loan during a Chapter 13 Bankruptcy repayment plan.

Many homeowners who purchased homes several years ago have seen their home equity skyrocket to record levels. Depending on the city, county, and state, some homeowners have home values double or even triple in less than five years. In the following paragraphs, we will cover cash-out refinance to buy out Chapter 13 Bankruptcy.

How Does The Chapter 13 Repayment Process Work?

The bankruptcy courts, through an assigned Chapter 13 Bankruptcy Trustee, will restructure the overall debts of the petitioners based on their income. A portion of the borrower’s income is allocated to pay the list of creditors of the petitioner. The debts are paid at a reduced amount based on the petitioner’s income. After the repayment term ends, the Bankruptcy Trustee will recommend that the U.S. Bankruptcy Courts discharge the Chapter 13 Bankruptcy. The remaining balance of the debts is then discharged when the Chapter 13 Bankruptcy is discharged.

How Difficult Is It To Get Trustee Approval For a Mortgage?

Bankruptcy trustees will almost always approve a home purchase or refinance mortgage while in a Chapter 13 repayment plan. Many people fear they will have difficulty getting bankruptcy trustee approval. That is not true. Unless you buy a mansion or luxury second home, most trustees see a home as necessary and will almost always approve a home mortgage.

The bankruptcy trustee normally signs off on an FHA or VA Chapter 13 Bankruptcy buy out cash-out refinance mortgage loan. Buying out  Chapter 13 Bankruptcy ends your Chapter 13 early.

Homeowners in an active Chapter 13 Bankruptcy with strong home equity may want to terminate their Chapter 13 Bankruptcy early by doing a cash-out refinance to buy out Chapter 13.  The following paragraphs will cover cash-out refinance to buy out Chapter 13 Bankruptcy with an FHA or VA loan.

How Does Chapter 13 Bankruptcy Affect Getting a Mortgage Loan?

There are two types of bankruptcies: Chapter 7 and Chapter 13 Bankruptcy. In the previous paragraph, We discussed qualifying for an FHA or VA loan after Chapter 7 Bankruptcy. Chapter 13 Bankruptcy is normally a five-year repayment plan. The bankruptcy trustee will restructure the petitioner’s debts, and a portion of the face value of the debt is spread out over five years.

How Does Chapter 13 Bankruptcy Get Discharged?

After five years, the remaining balance of the debts is discharged. Chapter 13 Bankruptcy discharge means the consumer is no longer liable for the debts and has a fresh financial start. Chapter 13 Bankruptcy does not affect approval for an FHA or VA loan. Borrowers can qualify for an FHA or VA loan after making 12 monthly on-time payments to the bankruptcy court from the Chapter 13 Bankruptcy filing date.

Credit Score Required For Buy Out Chapter 13 Bankruptcy 

For example, there are no minimum credit score requirements on VA loans. HUD, the parent of FHA, requires a minimum of a 500 credit score. HUD and the VA have similar, if not identical, guidelines on manual underwriting.

Most lenders always had lender overlays on VA loans, even though the VA does not require a minimum credit score requirement.

GCA never had lender overlays on FHA and VA mortgage loans. Most lenders required a 580 to 620 credit score requirement on VA loans before the coronavirus pandemic. However, the coronavirus economic mortgage meltdown has lenders think twice about their credit score requirements.

Rebuilding Credit During After Bankruptcy For Mortgage Approval

Consumers should rebuild and re-establish their credit during the Chapter 13 Bankruptcy repayment plan. The best and easiest method of rebuilding your credit during Chapter 13 Bankruptcy to qualify for a mortgage is by getting a few secured credit cards.

Secured credit cards are the easiest and fastest tool to increase and rebuild your credit scores.

In just two to three months after applying for secured credit cards, you will see a 20 to 50-point boost in credit scores for each secured credit card. The ideal credit card limit is $500, and the ideal number of secured credit cards you should get is three to five.

Mortgage Rates to Buy Out Chapter 13 Bankruptcy

Any borrower with a 680 credit score or lower can expect mortgage rates as high as 8.0%. Borrowers can expect to pay discount points. Is getting approved for FHA or VA loans under 620 FICO during the coronavirus pandemic crisis possible?

GCA Mortgage Group still has a network of wholesale lending investors who approve FHA and VA loans under 620 and down to 500 FICO during the volatile mortgage crisis.

For example, we just locked a loan for a VA manual underwriting borrower with a 530 FICO today at a rate of 7.75%, paying two discount points. How long will the mortgage crisis and skyrocketing inflation last?  Today, there is mass political turmoil with an incompetent President and chaos among members of Congress. In the meantime, the economic crisis is devastating to the mortgage markets.

What Are Discount Points For Borrowers With Low Credit Scores?

The mortgage secondary market had halted buying mortgages with lower credit scores. This is the main reason lenders have completely restructured their credit mortgage guidelines, called lender overlays. Many lenders with limited overlays raised their minimum credit score requirements to at least a 640 FICO. Others went further and increased their credit scores to 660 to 680 FICO.

How Long Does Chapter 7 Bankruptcy Take For Discharge?

As mentioned earlier, HUD and VA have the same bankruptcy guidelines on FHA and VA loans. In this section, we will compare Chapter 13 and Chapter 7 Bankruptcy.

Chapter 7 Bankruptcy takes 90 days after the filing date to get a discharge. Chapter 13 Bankruptcy is a debt restructuring plan that normally takes five years before the balance of the debts can be discharged.

Homeowners with equity in their homes in a Chapter 13 Bankruptcy repayment plan can do a VA Chapter 13 Bankruptcy Buy Out with a cash-out refinance on VA loans and dismiss the bankruptcy earlier than the scheduled discharge date.