Chapter 13 Cash-Out Refinance Guidelines

Per HUD and VA Chapter 13 cash-out refinance guidelines during repayment plan, homeowners can qualify for a cash-out refinance on an FHA or VA loan and pay off their Chapter 13 Bankruptcy early. Homeowners are eligible for VA or FHA loans during Chapter 13 Bankruptcy repayment plan with Trustee Approval.  Borrowers do not have to wait for the Chapter 13 discharge to be eligible to qualify for a refinance and/or purchase FHA or VA loans. It is important that you be timely on all of your scheduled payments throughout the Chapter 13 repayment term.

Chapter 13 Cash-Out Refinance Guidelines on Manual Underwriting

Lenders need to do manual underwriting for borrowers in an active Chapter 13. Make sure you study the FHA and VA Chapter 13 Cash-Out Refinance Guidelines during  Chapter 13 repayment because not all FHA and VA lenders will take them. Not all lenders accept the minimum HUD Chapter 13 Cash-Out Refinance Guidelines. There are lenders with lender overlays which means they can go above the minimum Chapter 13 Cash-Out Refinance Guidelines. 

HUD Chapter 13 Cash-Out Refinance Guidelines on Waiting Period After Filing Chapter To Be Eligible For Refinance

HUD, the parent of FHA, allows homebuyers and homeowners to be eligible to qualify for FHA loans during the repayment plan. This holds true for both purchase and refinance transactions. The borrower does not need Chapter 13 discharged. To be eligible, the borrower needs to have been in a Chapter 13 Bankruptcy repayment plan for at least 12 months. They need to have made 12 timely payments to the bankruptcy trustee with no late payments.

Chapter 13 Cash-Out Refinance Guidelines Allow Homeowners Can Cash-Out Refinance During Chapter 13 Repayment 

Chapter 13 Cash-Out Refinance Guidelines allow homeowners with equity to do a cash-out refinance and pay off the Chapter 13 balance. It needs to be manually underwritten. Trustee Approval is required. Many people worry about getting trustee approval. Trustees will approve a mortgage transaction.

HUD Agency Chapter 13 Cash-Out Refinance Guidelines

To simplify explaining Chapter 13 Cash-Out Refinance Guidelines, we will cover the general HUD Agency Mortgage Guidelines with regard to Bankruptcy. There is a two-year waiting period after the Chapter 7 Bankruptcy discharged date to qualify for FHA loans. Borrowers can qualify for both purchases and refinance FHA loans during the Chapter 13 repayment plan after 12 months into the plan with Trustee Approval.  Chapter 13 does not need to be discharged. Timely payments during the Chapter 13 bankruptcy repayment plan are required. It needs to be a manual underwrite.

Chapter 13 Cash-Out Refinance Guidelines on Buying Out Chapter 13 Early

If the borrower has equity in their home and is eligible for a cash-out refinance, they can proceed and use the cash-out proceeds to pay off their Chapter 13 debt balance. There are no waiting period requirements after the Chapter 13 bankruptcy discharge date. Paying the Chapter 13 bankruptcy debt earlier than the set payment date is also referred to as a Chapter 13 bankruptcy buyout. By doing so, the bankruptcy petitioner will be paying Chapter 13 earlier than the anticipated date.

HUD Cash-Out Refinance Guidelines on Paying Chapter 13 Early

Homeowners in Chapter 13 Bankruptcy who have equity in their homes can pay Chapter 13 early by doing FHA Cash-Out Refinance while they are in an active repayment plan. Bankruptcy Trustee Approval is required.

How Can I Pay My Chapter 13 Bankruptcy Earlier Than My 60-Month Repayment Term?
Here is how you are able to pay Chapter 13 debt earlier than the planned scheduled date:

1. Need to be in the repayment plan for at least 12 months and make timely payments
2. Qualify with a lender that does FHA manual underwriting
3. Find out how much equity you have. FHA allows up to 80% loan-to-value with cash-out refinance

4. Get approval from the Bankruptcy Trustee

Importance of Compensating Factors for Borrowers With High Debt-To-Income Ratio 

Compensating Factors are positive factors considered by lenders. Compensating Factors play an important role in making mortgage underwriters’ decisions on approving borrowers with higher debt to income ratios on manual underwrites.

  • The maximum front end debt to income ratio is 31% and back end DTI is 43% for borrowers with zero compensating factors
  • Maximum 37% front end and 47% back end DTI with one compensating factors
  • Maximum 40% front end and 50% back end DTI with two compensating factors