Do you have a bankruptcy on your record? If so, you might think it’ll be impossible for you to refinance your mortgage. True, a bankruptcy will make it more difficult, but not out of the question
We’ll take a look at how to refinance a home loan after a bankruptcy. We’ll cover how the different types of bankruptcies affect your ability to refinance as well as some other factors you’ll need to consider. Finally, we’ll show you the steps you’ll need to take to refinance after a bankruptcy.
What You Should Understand Before You Refinance
All bankruptcies aren't equal in the eyes of mortgage lenders. Let’s take a look at some of the things you should consider before you refinance.
Difference Between Chapter 7 and Chapter 13 Bankruptcies
The process you’ll go through to refinance after bankruptcy depends on the type of bankruptcy you’ve filed. Let’s go over the differences between the main types of bankruptcy: Chapter 7 and Chapter 13.
- Chapter 7: Chapter 7, sometimes called a traditional bankruptcy, discharges your debts. A Chapter 7 bankruptcy might allow you to release certain types of debt, but you won’t be able to wipe away things like student loans, child support and court-ordered judgments. It may also require you to liquidate some of your property. Chapter 7 bankruptcies stay on your credit report for 10 years.
- Chapter 13: A Chapter 13 bankruptcy doesn’t get rid of all of your debt. However, it does allow you to restructure your debt and hang onto your property. This procedure may allow you to spread your payments over a longer period of time or only pay back part of your loan. Chapter 13 bankruptcies leave your credit report after 7 years.
You might have a much more difficult time getting a refinance if you have a Chapter 7 bankruptcy on your credit report. This procedure indicates to lenders that you haven’t been able to reach an agreement to pay back your debt with past creditors. This makes you a much riskier borrower. Chapter 7 bankruptcies also stick around on your credit report for a longer period of time, which can negatively impact your credit score.
Lenders need to know that you have your finances under control before you can refinance, no matter which type of bankruptcy you have on your record. You can improve your chances of a successful refinance by keeping proof of your income and gathering documentation that proves you’re paying your bills on time. You may also want to get a letter from your employer that attests to your excellent performance and your long-term potential with the company. This tells lenders that you’re unlikely to lose your job and fall into debt. Be upfront and honest with lenders and stay positive.
Waiting Periods To Refinance
You can’t refinance until your bankruptcy waiting period is over. Both types of bankruptcy have a specific time frame during which you cannot get a mortgage loan or refinance.
- Chapter 7. You must wait at least 2 years after the discharge date before you can refinance your loan. The 2-year standard only applies to government-backed loans like FHA loans. Most lenders require that you wait 4 years after your discharge date for a conventional loan. Remember not to confuse your discharge date with the date you filed for bankruptcy.
- Chapter 13. You can qualify for a refinance as little as a day after the discharge date of your Chapter 13 bankruptcy if you have a government-backed VA loan. The waiting period is 2 years if you have a conventional loan. You can refinance as early as 1 year after bankruptcy if you have an FHA loan, but you need to have verification that you’ve paid all your bankruptcy payments on time for the past year.
You must also write a letter of explanation of the bankruptcy and submit it with the loan application if you refinance an FHA loan. You must also meet the individual standards of the lender you’re working with to qualify for a refinance.
These standards apply to anyone with a bankruptcy with a single major exception: If you’ve had more than one bankruptcy of any type over the last 7 years, you must wait 5 years before you can refinance your loan.
Benefits Of Refinancing After A Bankruptcy
Refinancing after a bankruptcy can have a number of advantages. Let’s take a look at some of them now.
- More manageable payments: You can lower your monthly payment when you take a longer term when you refinance your loan. This can help save you from falling back into debt.
- Cash to cover debts: Most types of bankruptcy (even Chapter 7) allow you to keep some form of equity in your home. Do you qualify for a cash-out refinance? You can take on a higher principal balance and get the difference in cash from your lender. You can put this cash toward debt payments and help improve your credit faster.
- Lower interest rates: Are interest rates lower now than when you initially got your loan? This may help you save thousands of dollars over the course of your loan. However, keep in mind that you may not have access to the best interest rates unless your previous bankruptcy expired from your credit profile.
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, you’ll 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 loan’s minimum credit requirements before you apply.
- You’ll still need to pay closing costs. Chances are, you don’t have much in savings post-bankruptcy. Keep in mind that you’ll 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 to 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.
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How To Refinance Your Home Loan After Bankruptcy
Now that you know how bankruptcy affects your chances of a refinance, let’s look at the process.
Step 1: Apply For A Refinance
The first step in any refinance is to apply with your lender of choice. You don’t need to apply with the same lender you already have a loan with.
Define your goals for your refinance, then begin comparing lenders. Some of the things you should consider include:
- Minimum loan standards: Make sure you meet the lender’s minimum credit score standards before you apply. It’s also a good idea to meet debt or equity standards as well.
- Availability: Choose a lender with availability and customer service hours that mesh well with your career or other obligations.
- Rates and fees: Rates and fees can vary from lender to lender. Don’t be afraid to take some time and choose one with reasonable refinance interest rates and fees.
Once you choose a lender, submit an application.
You can speed up the refinancing process by having all of your documentation in order before you apply for your new loan. Some documents you should have handy include your:
- 2 most recent W-2s
- 2 most recent pay stubs
- 2 most recent bank statements
Are you self-employed? Your lender might ask you for more information. When you apply for a refinance with someone else, such as a spouse, you’ll need to submit their documentation to your lender as well.
Step 2: Lock In Your Rate
You’ll usually get the option to lock in your interest rate once you complete your mortgage application. Mortgage rates change on a daily basis and when you lock in your rate, you’re securing today’s interest rate until your refinance closes. Locking your rate protects you against increases in interest rates that happen before you close. It also helps you plan your finances after your loan closes by keeping your premiums predictable.
Most lenders allow you to lock your interest rate for 30 – 60 days. You’ll usually have to pay an additional fee if you want to keep your rate locked for longer than 60 days.
Step 3: Underwriting And Appraisals
Your lender underwrites your loan after you submit all your documentation and paperwork. During the underwriting stage, your lender makes sure that you meet the minimum standards for a refinance and verifies your income. Most underwriting processes take 1 – 2 weeks, but any third parties involved with your loan can slow things down.
Your lender will also order an appraisal during the underwriting stage. Just like when you got your original mortgage, an appraisal gives you and your lender a rough idea of how much your home is worth. Lenders require appraisals for refinances because they need to know that your home value hasn’t decreased since you bought your home.
Step 4: Closing
Once underwriting finishes and your appraiser finalizes your estimate, your lender will schedule a closing meeting. At closing, you’ll have the opportunity to ask any last-minute questions about your loan, sign your new loan agreement and finish your refinance.
Your lender will send you a document called a Closing Disclosure before your closing meeting. Your Closing Disclosure has all the terms of your new loan and a tally of how much you’ll pay in closing costs. Once you get your Closing Disclosure, remember to tell your lender that you’ve received it. Your lender cannot schedule your closing until you acknowledge this document.
Bring the following documents with you to closing:
- Your photo identification
- A cashier's check or proof of wire transfer for your closing costs
- Your Closing Disclosure
You’ll see your money in your account a few days after you close on your new loan if you’re getting a cash-out refinance.
Refinancing with a bankruptcy on your credit report is difficult but not impossible. You have a better chance of getting a refinance if you filed for Chapter 13 bankruptcy and a lower chance with a Chapter 7 bankruptcy. Depending on your loan and bankruptcy type, you may need to wait anywhere from 1 day to 5 years after your bankruptcy discharges until you qualify for a refinance. Refinancing can be a good option for reducing debt and managing your monthly payments, but remember that you still must meet debt and credit standards before you qualify for a refinance.
To refinance, you’ll first compare lenders and submit an application. Your lender will allow you to lock in your interest rate while they underwrite your loan. Your lender will also schedule your appraisal and closing meeting. Attend closing, sign off on your new loan, and keep up with your payments to see your credit and finances improve over time.
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