HUD Chapter 13 Guidelines With Late Payments on FHA Loans

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This guide will cover the HUD Chapter 13 Guidelines with late payments on FHA loans. We will discuss qualifying for FHA loans during Chapter 13 Bankruptcy and whether you will be eligible for late payments.  Gustan Cho Associates are mortgage experts when it comes to guidelines surrounding bankruptcies. We offer all Conventional, FHA, and VA mortgages without LENDER OVERLAYS.

You can have prior bad credit, late payments, collections, and charge-offs, but lenders want you to have timely payments in the past two months. Mortgage lenders will not condone late payments during the Chapter 13 bankruptcy repayment plan or after a bankruptcy discharge. Late payers during Chapter 13 Bankruptcy or after bankruptcy discharge are considered second offenders and will not qualify for a loan. However, there are instances where you can qualify for FHA loans with late payments during Chapter 13 repayment plan and after bankruptcy discharge.

We can help clients currently in an active chapter 13 bankruptcy or under two years discharged from a chapter 13 bankruptcy. This blog will detail how to qualify for an FHA mortgage with a chapter 13 bankruptcy. This holds true even if you have had some late payments. This article will discuss and cover HUD Chapter 13 Guidelines with late payments on FHA loans.

HUD Chapter 13 Guidelines With Late Payments and Manual Underwriting

You must pass FHA manual underwriting requirements to qualify for an FHA mortgage with an active chapter 13 bankruptcy. Even if your chapter 13 bankruptcy is discharged, you will require a manual underwrite unless your discharge is over two years old.

The term “manual underwriting” scared many clients, but there is nothing to be scared of.

We complete hundreds of manually underwritten FHA loans every single year. We are the experts in this area. Lately, we have come across a few unique situations surrounding late payments. We will now detail a few basic qualifications for FHA manual underwriting.

Loan-To-Value Mortgage Guidelines

Loan-to-Value Requirements

• 500 – 579 – 10% down payment (or more)
• 580 and above – 3.5% down payment (or more)

Credit Score and MAX Debt-To-Income Requirements

• No credit score – DTI cannot be higher than 31%/43%
• 500 – 579 – DTI cannot be higher than 31%/43%
• 580 and above – DTI cannot be higher than 31%/43% with ZERO compensating factors
• 580 and above – DTI cannot be higher than 37%/47% with ONE compensating factors
• 580 and above – DTI cannot be higher than 40%/40% with ZERO discretionary debts
• 580 and above – DTI cannot be higher than 40%/50% with TWO compensating factors

HUD Chapter 13 Guidelines With Late Payments and The Importance of Compensating Factors

What are compensating factors:

• Verified cash reserves (3 months of PITIA for 1-2 unit homes and six months PITIA for 3-4 unit homes)
• Minimal increase in housing payment
• Significant additional income not used for qualifying income
• Pass FHA residual calculations

For more information on the debt-to-income requirements or compensating factor information, please call or text us on (800) 900-8569 or email alex@gustancho.com.

HUD Guidelines on Reserves

Reserve Requirements (not to be confused with compensation factors)

• 1-2 unit homes – 1-month PITIA
• 3-4 unit homes – 3-months PITIA

HUD Chapter 13 Guidelines With Late Payments and The Importance of Credit History and The Ability To Repay

Credit History Requirements

Credit history is the nuts and bolts of manual underwriting. Besides your credit score, your credit history will play a major factor in your qualifications.

Housing and Installment Debt

You must have a clean 12 months of payment history on all housing and installment debts. You are allowed two 30-day late payments in the previous 24 months, assuming those late payments are more than 12 months old (between months 13 and 24). An installment debt is a financial obligation like an auto-payment where your monthly payment is the same. If you do not have a mortgage reporting on your credit report, we will complete a VERIFICATION OF RENT to make sure you have on-time housing payments.

HUD Manual Underwriting Guidelines on Revolving Accounts and Collections

The FHA manual underwriting guidelines are a little more lenient on revolving accounts. You may not have any major derogatory missed payments on your credit report. FHA defines major derogatory as any payment over 90 days or three 60-day late payments. Any non-medical collections in the past 12 months are considered major derogatory credit. Meaning you can have a late payment or two on a credit card in the past 12 months and still may qualify for the FHA loan.

Derogatory Credit Tradelines

To qualify, derogatory credit items require a strong letter of explanation and sometimes supporting documentation. If you have collections totaling over $1,000, 5% of the balance due will be added as a monthly payment against your debt-to-income ratio. This is an FHA requirement.

Just because you are in a chapter 13 bankruptcy does not mean your financial life becomes easier. Typically, you are paying your creditors back less than you owe. However, you still have a significant monthly payment to the trustee, along with your everyday bills and expenses.

It is possible to miss a payment to the trustee and fall behind on your bankruptcy. If you fall behind far enough, the trustee will “dismiss” your bankruptcy, and you will not be eligible for a discharge. If this is the case, the creditors can return after you as you did not fill out your repayment agreement with the trustee. If you miss a payment and can catch up, you still may qualify for an FHA mortgage.

HUD Chapter 13 Guidelines With Late Payments During Repayment Plan

Late payments during a chapter 13 repayment plan. In this section, we will cover late payments to the trustee. Late payments are never positive regarding mortgage qualifications, but they may not disqualify you from getting a mortgage.

In the past, we have been able to close mortgages with late payments to the trustee during a chapter 13 bankruptcy. This is heavily frowned upon but still possible.

We have closed a borrower’s loan who was 60 days late to the trustee at the beginning of the Chapter 13 repayment plan. The trustee caught our borrower’s payments and extended her chapter 13 plan for two months. The underwriter was able to approve the loan. This is because she had a clean 12 months of payment history after that 60-day late payment. In this case, after her 60-day late payment, she had made 26 on-time payments to the trustee before applying for the FHA loan.

During the underwriting process, she needed to have a strong letter of explanation for the reasons for being late, explain how she recovered from the late payments, and explain that it would not happen again. That letter of explanation, along with the 26 recent on-time payments to the trustee, no derogatory marks on her credit report, and two months of reserves, allowed the underwriter to approve this mortgage.

HUD Chapter 13 Guidelines With Late Payments To Other Creditors Outside the Plan

Late payments to other creditors during a chapter 13 bankruptcy. This can be a little bit harder to get around. Our clients have opened up new credit during an active chapter 13 bankruptcy. This is a great way to raise your credit score during your repayment plan. This particular client opened six accounts in total, and two of those accounts went to collections.

Once a mortgage underwriter sees something, they cannot unsee it. Therefore, you need to make sure any paperwork you submit to the underwriter will not derail your mortgage loan approval.

As an underwriter, seeing six new liabilities and 33% of those going to collections is not a good sign. This borrower could document a short-term disability stint while the late payments occurred. The borrower broke part of his hand and could not work for two months. These minor credit cards did slip into collection status. Since the collection was over 12 months old, the borrower had medical documentation. The borrower will also need a strong letter of explanation. The underwriter was able to justify the derogatory collection accounts during an active chapter 13 bankruptcy.

HUD Manual Underwriting Guidelines on Late Payments

FHA manual underwriting does have specific requirements that must be met, and then some ambiguous items that are underwriter’s discretion. When an item is underwriter’s discretion, such as a late payment during a chapter 13 bankruptcy, the more supporting documentation you can provide, the better. Dale Elenteny, a senior loan officer for Gustan Cho Associates, said the following:

The main reasons underwriters will allow late payments are documented illnesses with medical documentation. Such as documentation showing you were physically in the hospital and unable to pay your bills. Or if there is a death of a wage earner in your family. Besides something catastrophic like the instances above, getting around late payments can be very difficult.

Gustan Cho Associates has seen every credit profile from the high 400s to the mid 800s. In an active chapter 13 bankruptcy, your credit scores usually hover around 580 to 600. This is a great threshold for manual underwriting. We strive to offer the best customer service possible, and our loan officers are currently on the changing mortgage guidelines. Many loan officers are not educated about manually underwritten mortgage loans. Please subscribe to our YouTube CHANNEL to stay updated with mortgage news!