Gather And Organize Your Documentation
Refinancing is similar to applying for a first mortgage. Youll need to supply the standard documents plus certain bankruptcy forms.
Here are some of the documents to have on hand before you apply:
- Bankruptcy discharge papers
- Recent pay stubs
- Federal tax returns for the past two years
Your loan officer will likely request additional forms to verify your income and credit.
Other Considerations Before You Refinance
Think that a refinance might be right for you? Here are a few things to think about before you apply.
- Bankruptcies hurt your credit score. No matter which type of loan you choose, youll need to meet minimum credit standards before you qualify to refinance. Bankruptcy puts a massive hit on your credit rating, so you may need to focus on raising it prior to your refinance. To avoid disappointment, know your credit score and your loans minimum credit requirements before you apply.
- Youll still need to pay closing costs. Chances are, you dont have much in savings post-bankruptcy. Keep in mind that youll still need to pay closing costs with most refinances. These costs can equal 2% 3% of your total loan value. You may be able to roll your closing costs into the principal of your loan if you have enough equity.
- Your old bankruptcy might still be on your credit report. Credit reporting bureaus must remove your bankruptcy from your credit report after 7 10 years, depending on which type you filed. However, credit reporting errors are common, and your old bankruptcy might still appear on your report. Make note of the date that your bankruptcy should no longer appear on your credit report, and make sure to follow up.
What Is A Reaffirmation Agreement
A reaffirmation agreement is a written document that can be filed in a Chapter 7 bankruptcy case. The reaffirmation is like a contract, and it is an agreement between you and a creditor that even though you have filed bankruptcy, you agree to be on the hook and agree to pay their debt anyway. A reaffirmation agreement, especially on mortgages, is entirely optional and rarely done. If the parties really want one for some reason, it is the mortgage company that has to prepare the agreement and sends it to you for signature. Many mortgage companies dont even bother to prepare it because most debtors dont sign anyway. Your attorney doesnt have any of the information needed to prepare the agreement, nor is it their job to draft it.
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Two Types Of Bankruptcy
- Chapter 7 Also called a liquidation bankruptcy, its the traditional route many people take. A chapter 7 bankruptcy discharges many kinds of loans while selling your assets to pay for a portion of your debt. You are not required to liquidate all your assets, though you may lose a large portion of it. A chapter 7 bankruptcy remains in your credit record for 10 years.
- Chapter 13 This bankruptcy is a payment plan option. It allows you to restructure your debts so you can pay them down within three to five years. This helps you create a workable payment plan to get out of debt while keeping your assets. However, if you fail to make payments, your lender is entitled to seize your assets. A chapter 13 bankruptcy stays on your record for 7 years.
Bankruptcies are generally more damaging to credit scores compared to foreclosures or short sales. This is because they impact multiple accounts. Defaulting on several loans takes longer to repair a borrowers credit history, which makes it harder to improve your credit score. It also requires a longer waiting period before you can apply again for credit.
Only consider bankruptcy as a last resort. Filing for bankruptcy incurs great damage on your credit history. Furthermore, bankruptcy does not discharge debts such as taxes, student loans, as well as child support and alimony. It also does not cover credit card purchases for luxury products and services.
How To Refinance A Mortgage After A Bankruptcy
There are many challenges for homeowners to re-establish credit after a bankruptcy, but home refinancing is one of the easiest ways to get begin the phase of rehabilitation. For homeowners, their property is one of their most important and valuable investments. Being able to use the liquidity in it for additional loans or taking the steps to refinance are two viable ways to reduce debt, improve your monthly payments, and generally improve your financial situation.
But for those who have gone through a bankruptcy, refinancing isn’t always as easy to do. However, it’s a myth that securing a home refinance after a bankruptcy is impossible to do. There are a few basic things worth understanding that can help you see that it’s something you can do, as long as you meet a few basic qualifications where refinance standards are concerned.
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Chapter 13 Bankruptcy Refinancing Waiting Period:
You could be eligible for refinancing as soon as one day after the discharge of your from your bankruptcy plan. This will depend on the reason for your bankruptcy, and the ability of your lender to navigate the rules associated with bankruptcies. However, for conventional home loans, youll have to adhere to a seasoning period of two years in most cases.
What Types Of Mortgage Can I Get After Bankruptcy
After bankruptcy and after fulfilling the required waiting period, you can get a conventional mortgage that follows Fannies or Freddies guidelines. You can also get an FHA mortgage, which you may have an easier time qualifying for because it has a lower minimum credit score requirement and shorter post-bankruptcy waiting periods. VA loans and USDA loans may be available to you as well if you meet the requirements.
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When Can I Refinance My Home After Bankruptcy
To know when youll be eligible to refinance, youll first need to complete your bankruptcy waiting period. Depending on your loan type, Chapter 13 bankruptcies may allow refinance as early as a year into making payments or up to 2 years after discharge. You can refinance your home after a Chapter 7 bankruptcy between 2 4 years after discharge.
Its important to understand the difference between your filing date and your discharge or dismissal date. Your filing date is when you begin the bankruptcy process, while the discharge or dismissal is when the process comes to an end.
Discharge means that the bankruptcy has been completed and your unpaid debts are written off. With Chapter 7, this will typically happen in a matter of months. Chapter 13 discharge happens once your repayment plan is completed, which takes between 3 5 years.
Dismissal is another way a bankruptcy filing can end, and means that your case has been dismissed either because you withdrew your filing or because you werent following the rules of the bankruptcy.
With Chapter 13, FHA and VA loan borrowers may be able to refinance while theyre still in bankruptcy, after theyve made a year of on-time payments according to their repayment plan.
On conventional loans, youll need to wait 2 years after Chapter 13 discharge to qualify for a loan. Remember that discharge on a Chapter 13 bankruptcy comes after youve completed your repayment plan, which also takes a few years.
Get A Fixed Interest Rate
If you have an adjustable-rate mortgage, dont forget that your monthly payments will increase after your introductory rate ends. Refinancing may help you lower your monthly mortgage payments and stay ahead of future interest rate increases.
A fixed interest rate can give you a greater sense of financial stability. Your monthly mortgage payments will stay the same for the life of the loan. And that can help make your long-term budgeting easier and improve your financial situation.
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Should You Have Reaffirmed Your Mortgage
But should your lawyer have recommended or tried to get your mortgage reaffirmed? Most likely not.
In bankruptcy, a reaffirmation agreement must be approved by either
- the bankruptcy judge, or
- your bankruptcy lawyer.
Bankruptcy court approval. Most bankruptcy judges will not approve mortgage reaffirmations, reasoning that a debtor can keep the house without reaffirming as long as he or she makes timely payments. This makes the reaffirmation an unnecessary liability. Often the only reason in favor of reaffirming is to reestablish a good payment history. Most bankruptcy judges feel that building future credit is not a sufficient reason to burden a debtor with mortgage liability.
Lawyer approval. If the judge wont sign off on the reaffirmation, then it wont be valid unless your lawyer signs a legal declaration stating that the reaffirmed debt will not impose an undue hardship on you or your dependents. Lawyers are very hesitant to sign such a document because they dont know what their own responsibility will be if you default. Lawyers also reason that if judges wont sign these agreements, then they shouldnt either.
The end result: Mortgages are almost never reaffirmed in bankruptcy.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
Can You Refinance After Bankruptcy
Yes, you can refinance your mortgage after bankruptcy, but having a bankruptcy on your credit report will make it more difficult to qualify.
It also depends on whether you file for Chapter 7 or Chapter 13 bankruptcy and the type of mortgage loan youre looking to refinance. You may have to wait several years before you can start the mortgage refinancing process.
If youre ready to refinance, Credible makes the process easy. You can see personalized prequalified rates from our partner lenders in just a few minutes. We also provide transparency into lender fees that other comparison sites typically dont.
Find out if refinancing is right for you
- Actual rates from multiple lenders In 3 minutes, get actual prequalified rates without impacting your credit score.
- Smart technology We streamline the questions you need to answer and automate the document upload process.
- End-to-end experience Complete the entire origination process from rate comparison up to closing, all on Credible.
The bankruptcy code is complex and can affect your credit history and ability to refinance in other ways, so be sure to speak with a bankruptcy attorney for personal guidance.
Waiting Period For Chapter 13 Bankruptcy
Chapter 13 bankruptcy waiting periods are generally shorter. For instance, after a Chapter 13 discharge, as long as youve made 12 qualifying on-time payments, youll only need to wait a day to refinance a government-backed loan.
The waiting periods to refinance after a Chapter 13 discharge are:
- FHA, VA, and USDA loans: 1 day with 12 qualifying on-time payments
- Conventional loans: 2 years
- Jumbo loans: 7 years
With conventional loans, if you dont complete the terms of your repayment plan, the court can dismiss your bankruptcy, and youll have to wait four years after that date to refinance your mortgage.
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How To Refinance After Bankruptcy
A mortgage refinance involves replacing your existing loan with a new mortgage, perhaps to secure a better mortgage rate, lower your monthly payment or cash out some of your available equity.
Youll essentially need to meet the same minimum requirements expected of someone getting a home loan after bankruptcy, with a few exceptions. Here are the steps to a mortgage refinance after bankruptcy:
Why Is It So Difficult To Refinance After Bankruptcy
No matter the circumstances that led to your bankruptcy, it does make it more difficult to refinance later. For lenders, bankruptcy demonstrates financial irresponsibility and classifies you as a high credit risk.
Despite a terrible accident, a divorce, or a downturn in the markets, lenders dont take this into consideration alongside your history of bankruptcy. Nor are the specific personal circumstances that led to the bankruptcy included in your credit history.
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Respond To Lender Inquiries
Once you submit your preapproval application, the rest is in your lenders hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If you seem like a good candidate, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lenders inquiries quickly to improve your chances of approval.
Usda Loan Requirements After A Bankruptcy
- You will have to wait three years after filing for bankruptcy
- Must be a citizen of the US or be an eligible non-citizen
- Must be legally able to borrow
- Must occupy the home as your primary residence
- Must currently be without safe and sanitary housing now
- Must not have the current ability to obtain a conventional loan from other sources and lenders
- May not be barred from participating in any federal loan programs.
- Must meet the income limits set by the program
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Length Of Time To Refinance After A Bankruptcy
The first thing to pay attention to is the duration of time you must wait after discharge before you can refinance. This is an exciting time for many because these rules have been changed dramatically over the last year. In the past, borrowers would have to wait 3 to 4 years to refinance following a bankruptcy depending on their lender. But today, that has been changed.
- Fannie Mae borrowers need only wait 2 years after a bankruptcy before they can refinance a bad credit mortgage.
- FHA borrowers may still need to wait 2 years, unless they qualify for the FHA Back to Work program, which makes it possible to apply for a loan after just 12 months.
This means that the duration you must wait before refinancing is much shorter than before, which in turn means that you are better able to start moving your finances back towards the kind of situation they should be in.
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Special Cases: Getting A Mortgage After Bankruptcy
Not everyone has a textbook case with an easy answer. Some applicants can achieve mortgage approval sooner than the prescribed waiting periods. They have what are called in the mortgage industry mitigating or extenuating circumstances. These are events beyond your control that caused your bankruptcy.
Others have issues that can lengthen the waiting time to get a mortgage after bankruptcy. Here are a few specifics.
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How To Prepare For A Mortgage After Bankruptcy
Bankruptcy friendly mortgage lenders are going to look at your entire situation to evaluate whether they feel comfortable moving forward with your mortgage. Extenuating circumstances will play a part. They will want to know why you filed for bankruptcy and also what you have been doing since then. Here are some of the things you can do to improve your chances.
Improve Your Credit Score Immediately after filing for bankruptcy, your credit score will drop a minimum of 100 points. Now, you need to begin building it back up. The better your credit score, the more likely you will be able to get a loan. Read about how to improve your credit score.
Down Payment Amount When you are ready to apply for a mortgage after your bankruptcy, one of the key factors will be how much you can put down for a purchase or how much equity you have in the home for a refinance. The more money you put down, the easier it will be to get a loan. The down payment amount may also impact your interest rate too. Depending upon how recent your bankruptcy occurred, you may have to put more down than if your bankruptcy happened over two years ago.
Make On Time Mortgage Payments If you have a mortgage when you file for bankruptcy, it is extremely important that you do not miss, or are not late on any mortgage payments. In fact, this may be a deal breaker. Do everything you can during this difficult time to make on time mortgage payments.
Can You Refinance Student Loans After Bankruptcy
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Bankruptcy leaves a lingering black mark on your credit history, with the financial effects lasting for several years. In most cases, youll still be left with your student loan debt, too. If still you find your payments unmanageable and want to refinance your student loans after bankruptcy, it can be challenging.
Most student loan lenders wont consider refinancing after bankruptcy. Other lenders put significant hurdles in place to make it much more difficult.
If you are thinking about filing for bankruptcy, you might want to consider your student loan refinancing options first. Although high student loan debt isnt always the reason for financial distress, it is often a contributing factor. For graduates carrying around multiple loans, or student loans with challenging terms, refinancing can provide significant financial relief.
Refinancing combines all loans into one easy-to-manage monthly payment. It can also provide significant savings often thousands of dollars over the life of the loan.
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