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Personal bankruptcy can help you recover from financial problems, but the process can affect your creditworthiness for several years.
For example, you might want to refinance your mortgage to improve your repayment options. While refinancing after bankruptcy is not impossible, it can be more difficult to get qualified.
Here’s an overview of what you can look forward to when refinancing a home loan after bankruptcy.
Can you refinance after bankruptcy?
Yes, you can refinance your mortgage after bankruptcy, but having bankruptcy on your credit report will make it difficult to qualify.
It also depends on whether you are filing for Chapter 7 or 13 bankruptcy and the type of mortgage you want to refinance. You may have to wait a few years before you can start mortgage refinancing process…
If you are ready to refinance, Credible will make this process easier. You can see personalized prequalified rates from our partner lenders in just a few minutes. We also provide transparency of lender fees, which other comparison sites usually don’t.
Chapter 7 bankruptcy versus chapter 13 bankruptcy
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy. Both filing options can reduce your overall debt balance.
Here are some of the main differences between chapters 7 and 13 and how they might affect your mortgage refinancing:
|Chapter 7||Chapter 13|
|You will sell (liquidate) your assets to pay off debt||You will enter a debt repayment plan|
|You can receive a statement within six months from the date of application.||You must pay off the debt within 3-5 years before the balance is paid off.|
|May lead to foreclosure of the home||Stops the foreclosure procedure|
|Remains on your credit report for 10 years after filing||Remains on your credit report for seven years after filing|
|Minimum waiting period for applying for refinancing after the date of discharge:
||Minimum waiting period for applying for refinancing after the date of discharge:
The bankruptcy code is complex and can affect your credit history and your ability to refinance in other ways, so be sure to check with a bankruptcy attorney for personal advice.
Chapter 7 bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the sale of assets in advance to pay off outstanding debts. It will remain in your personal credit history for 10 years from the date of application.
Under Chapter 7, a bankruptcy trustee – the person appointed by the court to oversee your bankruptcy – may sell some of your unused assets to meet the payment claims of creditors. Unpaid assets typically include:
- Second house
- Newer model car or second car
- Stocks, bonds and other investments
- Piece of art
- Expensive clothing
- Valuable collections such as a stamp collection or sports memorabilia.
If the value of your unused assets is not sufficient to cover your debts, the trustee can foreclose your foreclosure on your home. This is what makes Chapter 7 more risky than Chapter 13 in the first place.
Chapter 7 bankruptcy waiting period
If you manage to keep your home, you may not be eligible for refinancing right away. You will need to wait several years after the court recognizes your bankruptcy before you can apply for another home loan.
The waiting period for refinancing after you leave a Chapter 7 termination depends on the type of your mortgage:
- FHA Credit: 2 years
- VA Credit: 2 years
- USDA Credit: 3 years
- Ordinary loan: 4 years
- Large loan: 7 years
These multi-year waiting periods allow the lender to see if you can manage your remaining debt after liquidation. After applying for Chapter 7, it can be more difficult to refinance than after applying for Chapter 13 because the waiting periods are longer and the event remains on your credit report for three additional years.
Chapter 13 bankruptcy
When you file for Chapter 13 bankruptcy, you agree to a repayment plan to pay off your debts and write off any remaining balances after the repayment plan is completed. Chapter 13 bankruptcy stays on your credit report for seven years.
One of the main benefits of filing Chapter 13 is that it stops foreclosure proceedings. If you can make the mortgage payments during the repayment period, you will be able to keep your home.
Chapter 13 bankruptcy waiting period
The waiting times for Chapter 13 bankruptcy are generally shorter. For example, after a Chapter 13 termination, if you made 12 qualifying payments on time, you will need to wait just a day to refinance a government-backed loan.
Waiting times for refinancing after Chapter 13 statement:
- FHA, VA and USDA Loans: 1 day with 12 qualified timely payments
- Conventional loans: 2 years
- Large loans: 7 years
In the case of conventional loans, if you do not meet the terms of your repayment plan, the court may reject your bankruptcy and you will have to wait four years after that date to refinance your mortgage.
Benefits of refinancing a home loan after bankruptcy
There are several benefits of refinancing after bankruptcy:
- Smaller monthly payment: Refinancing can lower your minimum monthly expenses to a more budget-friendly amount.
- Lower mortgage rate: Taking advantage of the low refinancing rates, you can reduce the amount of interest you will pay over the life of the loan.
- Switch to fixed interest rate: If you currently have an adjustable rate mortgage (ARM), refinancing to a fixed interest rate can provide more stability to your monthly payments.
- Additional funds for debt repayment: You can consider cashing refinancing and use the equity in your home to pay off debts at high interest rates.
How to Refinance a Mortgage After Bankruptcy
Follow these steps to refinance your mortgage after bankruptcy and increase your chances of getting approved.
1. Focus on credit recovery
Harder qualify for refinancing with bankruptcy on your credit report. In addition, registration will continue to negatively impact your credit score until the item is removed from your report.
However, there are several ways improve your credit rating:
- Timely payments on loans and credit cards
- Do not apply for new credit accounts
- Maintain a loan utilization rate on revolving accounts below 30%
- Dispute errors in a credit report
Credit recovery also shows mortgage lenders that you can responsibly manage your loan and make payments on your current home loan and any other debt on time. It will also help you get better rates and conditions.
2. Make sure the timeout period has expired.
You will also need to meet the minimum post-bankruptcy waiting period after your hospital discharge date. As discussed above, the waiting period depends on the type of loan and the bankruptcy chapter.
You will also want to make sure you meet the lender’s credit and financial requirements before applying. For example, you must meet the minimum credit score and stay below the maximum. debt to income ratio (DTI) indicated by the lender.
3. Collect and organize your documentation.
Refinancing is like first mortgage application… You will need to provide standard documents and certain forms of bankruptcy.
Here are some documents to have on hand before applying:
- Bankruptcy Release Documents
- Loan explanation letters for derogatory subjects
- Latest payroll receipts
- Federal tax returns for the last two years
Your loan officer will most likely ask for additional forms to verify your income and credit.
4. Compare lenders and types of loans.
It is important to compare your refinancing options from several lenders to find the best rates and conditions. You can also get a higher rate by increasing your credit score, increasing your down payment, and choosing a shorter loan term.
5. Apply for refinancing
The last step is to apply for mortgage refinancing. The move requires a tough credit check, but the new repayment terms could be worth a temporary credit rating downgrade.
Alternatives to refinancing after bankruptcy
Refinancing your mortgage after bankruptcy may not be the best financial solution for your circumstances. For example, refinancing costs may be too high or you may still be within the minimum waiting period. If so, consider the following mortgage refinancing alternatives:
- Make additional payments: Consider making additional payments to pay off a high interest debt and mortgage. You can pay off the loan early and minimize interest. Instead of paying for closing costs, use these funds as an additional payment.
- Renewal of mortgage: Many ordinary loans are eligible for mortgage processing… This requires a one-time payment to reduce your principal balance and lower your monthly bill. The due date and interest rate remain the same, no credit check is required.
- Mortgage modification: Your lender may also be susceptible to changing your mortgage… It is possible to extend the maturity or to temporarily reduce the interest rate without refinancing. However, the total cost of the loan may be higher if you have more monthly payments.