Hi everyone,
I didn't see much information on this topic when I was in need of information, so I thought it would be helpful to someone out there to share my experience with (successfully!) purchasing a home during an active Chapter 13.
The FHA Back to Work program is an FHA "extenuating circumstances" program that allows a home purchase one year after confirmation of a 13 or a foreclosure, essentially waiving FHA's typical 3 year waiting period. You must meet the following criteria to receive approval:
I didn't see much information on this topic when I was in need of information, so I thought it would be helpful to someone out there to share my experience with (successfully!) purchasing a home during an active Chapter 13.
The FHA Back to Work program is an FHA "extenuating circumstances" program that allows a home purchase one year after confirmation of a 13 or a foreclosure, essentially waiving FHA's typical 3 year waiting period. You must meet the following criteria to receive approval:
- Have a lot of patience. Really. By the time you receive approval for your loan, you'll swear you are part of an elaborate and cruel experiment.
- Have documented proof of a 20% or more loss in household income preceding your foreclosure/bankruptcy, and the loss of income must be out of your control (e.g. job loss).
- Be at least 12 months past foreclosure or confirmation of bankruptcy.
- Since the foreclosure or bankruptcy, your payment history must be pretty spotless -- demonstrable on time utility payments, payments to Trustee, no more than one 30 day late payment to anyone, etc.
- You must take a "pre-purchase counseling" course 30 days before you formally apply for loan approval. I did this online and obtained the certificate through e-mail.
- Find a lender with a clue. I contacted large lenders that claimed to know how to implement this program, and gave up on each of them when it became clear that they had no idea what they were doing. I ended up finding a post from a lender on zillow that had demonstrated success with doing Back to Work program loans, and he was amazing to work with throughout the process. There are lots of pitfalls when applying for this program. Make sure you have a lender on board that understands what they're doing, and isn't terrified by the words "manual underwriting".
- Keep everything. Make sure you have proof of all of your Chapter 13 payments, your utility payments (all of them!), your rent payments, any loans being paid outside of your 13 per your Plan (e.g. car loans, student loans, whatever).
- Start writing a brief (1 page) letter of explanation as soon as possible, and revise it until it's perfect. You have one shot to demonstrate that you had an unplanned loss/decrease in income, that you were forced into filing 13/foreclosure, that you're responsible and are recovering from the event, etc.
- Make sure you have at least 3.5% to put down on the house, and that the cost of the house you're considering is within FHA limits for your state. The down payment cannot be made with "gifted" funds, and must be documented as coming from your own personal funds. Closing costs can be paid with gifted funds.
- "This may take awhile". Be up front with the seller, and make sure they know it may take you some time to close. You don't want to get approved only to have to start your house search over because your seller moved on. Manual underwriting takes time, FHA appraisals take a little time, meeting all program requirements takes time. Also, make sure your attorney submits your Motion to Incur Debt to your Trustee as soon as you possibly can. You won't receive final loan approval without that approved/signed motion from the court.
- If you have what your lender considers "unusual transactions" in your bank accounts, be prepared to account for all of them. I had to write several letters explaining even not-so-unusual transactions, such as transfers between checking and savings (and vice versa).
- FHA doesn't have a minimum credit score for this program, but you can be sure your lender will. For me, the magic number was 640. Higher is always better, but you're not going to have a 750 in an active 13 anyway.
- Make sure you are extremely timely in responding to requests for information, etc. Your lender has a lot of work to do in order to get this done, which you cannot control. What you can control is making sure you are doing everything in your power to help yourself get approved, which means full and complete documentation and quick responses.
Bankruptcy Wizard
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