Can You Refinance Your Home After Bankruptcy?
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Summary:
You can refinance your home after bankruptcy. If you filed for Chapter 7 bankruptcy, you can obtain conventional loans within four years, and government-backed loans (including FHA loans and VA loans) within two to three years. If you filed for Chapter 13 bankruptcy, the waiting periods are two years for conventional loans and just one day for government-backed loans once you’ve made 12 qualifying on-time loan payments. Staying informed of your credit report, obtaining a secure credit card, and increasing your credit mix can help your credit bounce back after a bankruptcy.
Bankruptcy can be a scary thing to have on your financial record, and a challenging bind to get out of. With a bankruptcy on your credit report, it can be difficult to obtain loans, credit cards, get a job, and hold property. You can even have your house taken from you if it’s necessary to repay creditors.
Refinancing your home after bankruptcy can help your finances get back on track and start the process of rebuilding your credit. Depending on whether you filed for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you can refinance within two to four years of your bankruptcy filing date. For Chapter 13 filings, you can even obtain government loans within just one day once you’ve made 12 qualifying on-time loan payments.
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How long after bankruptcy will credit improve?
Although it depends on the type of bankruptcy you go through, you can typically begin working to improve your credit score within 12-18 months after your bankruptcy court filing date. You can start by requesting a credit report from the three credit bureaus, which will show you all of the issues with your credit score. Additionally, if there are any debts you don’t recognize, you can use the credit report to dispute them.
More read: Here we have a list of best credit cards after bankruptcy
Can you refinance after bankruptcy?
You can refinance your mortgage payments after bankruptcy. However, having a bankruptcy on your credit report will make it more difficult to qualify for any refinancing opportunities. It will likely be a long road. It could take years of effort repairing your credit reports before refinancing lending services will approve your application with reasonable interest rates.
Refinancing after bankruptcy also depends on whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. These are the two most common types of personal bankruptcy filings.
Apply for a refinance
You first need to meet the lenders’ requirements before you can apply for a refinance after bankruptcy. For conventional loans, this means having a credit score of at least 620. For FHA loans, VA loans, or other government-backed loans, you typically need a credit score of at least 580.
When applying, you’ll need to provide the mortgage lender with documentation proving you have an income and showing any assets you plan to use to qualify for the loan. Typically, these documents include your:
- Two most recent W-2s
- Two most recent pay stubs
- Two most recent bank statements
Pro Tip
If applying with an additional party, such as a spouse, be sure to also have these documents prepared for them before meeting with your lender.
Lock in your mortgage rate
Since interest rates change on a daily basis, you should try locking in your mortgage rate once you complete your application. This will protect against interest rate fluctuations and can help you better plan your finances.
Most lenders allow you to lock in your interest rates for 30-60 days. If you go past the 60-day mark, you might have to pay an additional fee to keep your interest rate locked in.
Prepare for a home appraisal
Most lenders require a home appraisal to complete the refinancing process. This ensures they aren’t lending more on the home than the amount it is worth. An appraiser will evaluate the home’s condition, including square footage, number of bedrooms, and the home’s age.
The appraiser will also evaluate the sale price of comparable homes in your neighborhood to determine the proper market value of your home.
Close on the loan
When everything is complete, your lender will schedule a closing meeting. You’ll have the opportunity to ask any remaining questions you may have and officially complete the refinance process.
Your lender will give you a document called a Closing Disclosure that will include all the terms of your new loan and a summary of how much you’ll pay in closing costs.
Pro Tip
Acknowledge that you’ve gotten your Closing Disclosure upon receipt. Your lender is not able to schedule your closing meeting until you’ve acknowledged the Closing Disclosure.
Chapter 7 bankruptcy
With Chapter 7 bankruptcy, your assets are liquidated and used to settle any debts you may have. It takes between four to six months to complete, and stays on your credit report for 10 years from the filing date. This is the most common type of bankruptcy.
A bankruptcy trustee who is appointed by the bankruptcy court to oversee your case may sell some of your nonexempt assets to satisfy your creditors. This could include a second home or car, jewelry, stocks, and other investments. If the value of your nonexempt assets isn’t enough to cover all of your outstanding debts, the bankruptcy trustee may foreclose on your home.
Completing Chapter 7 bankruptcy eliminates most of your debts. However, certain types of debts, including tax debts, are considered nondischargeable, which means they won’t be erased in bankruptcy.
Pro Tip
Because of the complicated nature of bankruptcies, it might be beneficial to consult a bankruptcy attorney when going through this process.
How long after a Chapter 7 can I buy a house?
If you’ve gone through a Chapter 7 bankruptcy, you’ll need to wait at least four years after the court discharge date to qualify for conventional loans or take out a mortgage.
That said, government-backed mortgage loans are easier to obtain. For example, you’ll need to wait three years after the bankruptcy court’s discharge date to get a loan from the United States Department of Agriculture (USDA). The waiting period to qualify for a Federal Housing Administration (FHA) loan or a loan from the United States Department of Veterans Affairs (VA) is two years after your court discharge date.
Pro Tip
Some lenders will make you wait longer than the minimum period before they will issue you a loan, so plan accordingly once you have met the minimum waiting period.
Will my credit score go up 2 years after Chapter 7 discharge?
You can typically begin working to improve your credit score within 12-18 months after the filing date of your Chapter 7 bankruptcy. Although you can’t remove bankruptcy from your credit report before the 10-year period has passed, there are steps you can take to begin improving your score.
Chapter 13 bankruptcy
Chapter 13 bankruptcy is more of a softer form of bankruptcy. While it doesn’t completely get rid of your debt, it does let you restructure your debt and retain ownership of your property—as long as you can continue make your mortgage payments on time.
This form of bankruptcy takes between three to five years to complete. It can allow you to spread out your payment plan over a longer period of time, or only make you pay back part of your loan. Chapter 13 bankruptcy stays on your credit report for seven years.
How long after Chapter 13 bankruptcy can I buy a house?
Waiting periods for Chapter 13 bankruptcy are generally shorter than those for Chapter 7 bankruptcy. Conventional loans require a minimum waiting period of two years. Government-backed loans from the USDA, FHA, and VA have a minimum waiting period of only one day once you’ve made 12 qualifying on-time loan payments.
Are there benefits to refinancing my mortgage payments after bankruptcy?
Refinancing your mortgage payments after bankruptcy does come with benefits. Once you’ve completed the necessary waiting period, you are free to refinance your mortgage. There are several ways this can help you.
Lower monthly payments
Refinancing your mortgage can help you lower your monthly payment to an amount that’s easier to pay. This can help keep you from falling back into debt.
Longer loan terms
You can also help lower your monthly payment by refinancing into a loan with a longer loan term. This lengthens the amount of time you can take to pay the loan back to the lender.
More cash for debt payments
A cash-out refinance lets you utilize the equity you have on your home. This can help you pay off high-interest debts, which will improve your credit scores faster.
What are alternatives to refinancing my home after bankruptcy?
There are some reasons why you might not want to refinance your home after bankruptcy. It may not be the best decision for your financial future, or you may still be stuck within the bankruptcy waiting period.
Mortgage modification
A mortgage modification allows your lender to change your mortgage loan to extend the repayment period or temporarily reduce the interest rate without having to refinance.
Making extra payments
Making extra payments on your debt and home loan can help pay the loan off sooner and lessen your interest charges. Closing costs can be used as an additional payment.
Mortgage recasting
A conventional loan may qualify for a mortgage recast. This requires an up-front lump sum payment that reduces your principal balance and lowers your monthly payment.
How can I remove a bankruptcy before 7 years?
The only way to remove a bankruptcy from your account before the waiting period is over is to file a dispute of the bankruptcy with the credit bureaus. To do this, you can send a letter to the credit bureaus outlining the inaccurate information you found and disputing it. Sometimes the bankruptcy remains on the credit report after the waiting period has passed, or errors in how the bankruptcy was reported are shown.
Otherwise, the only way to get a bankruptcy off your credit report is to allow the minimum waiting period to pass. For Chapter 7 bankruptcy, the waiting period is 10 years, and for Chapter 13 bankruptcy, the waiting period is 7 years.
How can I bounce back after bankruptcy?
Once you’ve been through a bankruptcy, it’s important to take steps that will ensure you don’t have to go through it again. You can also begin working toward rebuilding your credit score.
Stay informed of your credit report
You should stay on top of your credit report to make sure it reflects the fact that the waiting period has passed and the bankruptcy is no longer on your report. If you’re still being held liable for past debts, it can impact your ability to obtain loans and get credit cards. You can dispute any erroneous charges or other errors with the report issuer.
Obtain a secured credit card
Obtaining a secured credit card can help you start rebuilding your line of credit. Once you’ve made enough payments on the card in a timely manner, you can qualify for an unsecured credit card and begin raising your credit score.
Increase your credit mix
Your credit mix is defined as the variety of loan in your credit file, and can count for upwards of 10 percent of your overall credit score. Reporting on-time payments to the credit bureaus can raise your score and help you start repaying some of your higher interest loans.
The bottom line? It will take some time to prove to lenders that you are not a risk anymore. But once you get there, refinancing your mortgage might be a good way to get your finances back on track. Check out SuperMoney’s Ultimate Guide to Bankruptcy to help rebuild your credit and resettle your debts.
Key takeaways
- You can typically begin working to improve your credit score within 12-18 months after your bankruptcy court filing date.
- With Chapter 7 bankruptcy, your assets are liquidated and used to settle any debts you may have. It takes between four to six months to complete, and stays on your credit report for 10 years from the filing date. This is the most common type of bankruptcy.
- Chapter 13 bankruptcy lets you restructure your debt and retain ownership of your property as long as you can continue make your mortgage payments on time. This form of bankruptcy takes between three to five years to complete.
- USDA loans, VA loans, and FHA loans have a waiting period of only one day for Chapter 13 bankruptcy, once you’ve made 12 qualifying on-time loan payments.
- Lower monthly payments, longer loan terms, and more cash for debt payments are all benefits to refinancing your home after bankruptcy.
- Alternatives to refinancing after bankruptcy include mortgage modification, making extra payments, and mortgage recasting.
- The only way to remove a bankruptcy from your account before the waiting period is over is to file a dispute of the bankruptcy with the credit bureaus.
- Staying informed of your credit report, obtaining a secured credit card, and increasing your credit mix can help your credit bounce back after a bankruptcy.
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