HELOC before of after Chapter 13 Discharge

[anunezal]

Hi all, Happy new year. I am around 6 months to complete my Chapter 13!! Now, my home requires so many fixes that have been postponed due to the CH13. I was thinking to get a Home equity loan to do all the fixes needed.

I was wondering what will be better, to get the loan before the Discharge (with Trustee approval), or wait after the discharge. I was reading some places, I will only qualify during the CH13 with the approval, and if I wait for the discharge, I may need to wait another 2 years till goes out of my record. No clue what is the correct information. Just wondering what will be the ease path. I prefer after discharge to avoid dealing with Trustee.

Please advise
Thank you!

[justbroke]

The only loans for which an active Chapter 13 debtor is eligible is FHA (and maybe VA). It simply requires the debtor to have made at least 12 on-time payments to the trustee, verify those payments, and otherwise qualify for the loan. The biggest hurdle is finding a lender that will do this since it requires manual underwriting even if the HUD Prospector/DU system comes back with Approve/Eligible. If you already have an FHA loan, you can usually do a streamlined refinance with potential cash out (to do the repairs), but I've never tried one. For a discharged Chapter 13 the waiting period changes to one year.

All I know is that it is possible under FHA when working without their limits. It's a lot of work but can be done.

The reason most people try to do this in an active Chapter 13 is because many lenders will still have what are known as overlays on top of the FHA (HUD) program. The overlay may require it to be an active Chapter 13 (because they can easily check with the Trustee and ensure payments), or the overlays could just them be simply being risk adverse. While the FHA does allow loans down to a middle score of 580, most lenders have an overlay requiring a minimum middle score of at least 620 and some up to 640/650. They may also demand seasoning, reserves and other things. I would say the more overlays a lender has, the more risk adverse they are (they don't really want to do the loan).

I can't help you specifically with a loan while in the Chapter 13. I did get an FHA loan 3 years after my discharge so as not to deal with that special 12-month rule. The problem with that 12-month rule is that many lenders interpret it to mean you have to be in an active Chapter 13. Actually, mine wasn't even quite 3 years. I was approved for my FHA at 2 years 10 months and closed at 2 years 11 months... and it was a major lender. (I was Approve/Eligible a year earlier when I started the process to purchase a different home.)

I know of two lenders that kept pestering me while I was in my active Chapter 13 to borrow... they were People's Bank
and Republic Bank.

[anunezal]

justbroke thank you for detail explanation. I don't have a current FHA mortgage. I believe i have around 690 FICO. I prefer to wait till the discharge, so I don't have to deal with the Trustee. That 1 year rule, is it also after discharge? Thank you

[justbroke]

The 1-year rule is post discharge. However, you'll have trouble if you're looking for a HELOC. While an HEL (home equity loan) may be possible, a HELOC will likely not be possible without the bankruptcy discharge maturing more. I would say that a HELOC may be possible after 2-4 years post discharge. If you were in a 5-year Chapter 13, then the Chapter 13 will fall off about 2 years after discharge, so that makes sense.

For a HEL the terms are a little more flexible but you may still have bankruptcy seasoning issues with Fannie Mae, Freddie Mac and other conventional loans..

Doesn't mean it's impossible but the chance for an actual HELOC shortly after Chapter 13 is more improbable than probable. However, if you want to just do a straight cash-out refinance, that could be possible after the 1-year point if you fit into an FHA loan. The downside, right now, are the mortgage rates.

[anunezal]

Thank you justbroke. Looks Like I didn't know the difference between HELOC and HEL. Would it be easier to get a HEL after the ? discharge? or is the same rules as the HELOC? thank you

[flashoflight]

HELOC/HEL is second position which is much riskier for the lender. Credit underwriting is going to be much tighter. Conventional won't take 13 for 2 more years after discharge and that's a first position lien.

Another issue is if you took mortgage forbearance during the pandemic, you have an existing second position lien that will need to be paid off with the proceeds of the new loan. So you're giving up a 0% rate zero payment lien for something a lot worse.

I think you will need to get an unsecured personal loan for the home repairs. Your only other out is to cashout refinance the 1st position lien to a much worse rate on the whole balance and not just the cashout portion needed for repairs.