Can you refinance after bankruptcy?

If you’ve gone through bankruptcy, you may be wondering if it’s possible to refinance your home. The short answer is yes. While the road may be more complex and require some extra planning, many homeowners successfully refinance their mortgage after bankruptcy.

Facing bankruptcy can feel overwhelming, especially when it affects your mortgage. Refinancing can help you by lowering your monthly payments, reducing your interest rate, or allowing you to borrow your home equity. As you explore your options, be aware of mortgage scams that often target vulnerable homeowners seeking to refinance.

What is Chapter 7 bankruptcy? 

Chapter 7 bankruptcy, also known as liquidation bankruptcy, allows individuals to eliminate most or all of their unsecured debts, such as credit card balances, medical bills, and personal loans. It’s designed to offer a fresh financial start to those who qualify, but it comes with specific requirements and has a long-term effect on your credit.

To file Chapter 7, you must pass a means test, which compares your income to the median income in your state. This test ensures that only individuals who truly cannot afford to repay their debts are eligible. If your income is too high, you may not qualify for Chapter 7 and may need to consider another form of bankruptcy, like Chapter 13.

A court-appointed trustee oversees each Chapter 7 case and is responsible for evaluating your assets and debts. You’ll be required to list and assign a value to your possessions. While many essentials are protected by exemptions, such as household goods, a vehicle, or even your primary residence, these items must meet specific value limits. If any of your assets exceed those limits, the trustee may repossess and sell them to repay creditors.

Once your case is completed and discharged, all applicable debts are wiped out, offering you a clean financial slate. A Chapter 7 bankruptcy will remain on your credit report for 10 years, which can affect your ability to borrow money or refinance your mortgage.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy, often referred to as a debt reorganization bankruptcy, allows individuals to restructure their debts into a manageable repayment plan rather than wiping them out completely. Chapter 13 provides filers with the opportunity to take control of their finances, catch up on missed payments, and work toward recovery without losing key assets, such as a home or car.

When you file for Chapter 13, the court helps you create a repayment plan, typically lasting 3 to 5 years, based on your income, expenses, and outstanding debts. You may be required to pay back only a portion of what you owe, and once you complete the plan, any remaining qualifying debt may be discharged.

Chapter 13 can be a powerful option for people with a steady income who need time and structure to get back on track. However, like all bankruptcies, it does affect your credit. A Chapter 13 bankruptcy remains on your credit report for 7 years, which can affect your ability to borrow or refinance. However, it’s often seen more favorably than Chapter 7 by some lenders.

Refinancing after bankruptcy

If you file for Chapter 7 or Chapter 13 bankruptcy, you’ll need to wait a while before applying for a new loan. These waiting periods vary depending on the type of bankruptcy you filed and the kind of loan you’re applying for.

For most loan types, lenders require that a set number of years pass after your bankruptcy discharge or dismissal before they’ll consider you eligible for refinancing. Government-backed loans, such as those offered by the Federal Housing Administration and the Veterans Affairs, typically have shorter waiting periods. Conventional loans follow guidelines set by the Federal Housing Finance Agency that allow lenders to sell those loans to Fannie Mae and Freddie Mac. Jumbo loans, which exceed conforming loan limits, tend to have the longest waiting periods and the most stringent requirements.

If you’ve had more than one bankruptcy in the past 7 years, conventional lenders may require a 5-year waiting period from the date of the most recent discharge or dismissal.

Before applying, check your credit score and make sure it’s high enough to qualify for a loan. In some cases, you may also need additional documentation or court approval, especially if you’re still in a Chapter 13 repayment plan.

Can you refinance during a Chapter 7 or Chapter 13 bankruptcy?

Lenders generally won’t approve a new loan application from someone in the middle of a bankruptcy process, and even if they did, the bankruptcy court would need to authorize the transaction.

That’s because bankruptcy proceedings place legal restrictions on your financial decisions, including taking on new debt or restructuring existing debt, like a mortgage. Whether you’re pursuing Chapter 7 or Chapter 13, the court’s focus is on resolving your current debts, not adding new ones.

Most lenders won’t allow you to refinance your mortgage while you’re in Chapter 7 bankruptcy. While it may be possible to refinance your mortgage as part of the restructuring of debt under a Chapter 13 bankruptcy, you’ll generally need to wait until your bankruptcy case is resolved and the required waiting period has passed.

What are the benefits of refinancing after bankruptcy?

If you’ve gone through bankruptcy, refinancing your mortgage can be a strategic step toward long-term financial recovery. Once you’re eligible, refinancing can offer meaningful benefits that help you manage your money more effectively and rebuild your financial foundation.

More manageable payments

One of the biggest advantages of refinancing is the potential to reduce your monthly mortgage payment. By securing a lower interest rate or extending your loan term, you may reduce your payment to something more affordable. This can free up cash in your monthly budget and ease financial stress.

Want to see how much you could save? Try our refinance calculator to estimate your new monthly payment and long-term savings. For more insights into where mortgage rates are heading, check out our mortgage interest rate forecast.

Cash to cover debts

A cash-out refinance allows you to borrow your home equity and repay it as part of your new loan. Many homeowners use this option to pay off high-interest debts, cover medical bills, or manage unexpected expenses. Even if you’ve been through a Chapter 7 or Chapter 13 bankruptcy, you may still have equity in your home that you can tap into.

What to consider before refinancing after bankruptcy

Refinancing after bankruptcy can be a smart move, but it’s important to carefully weigh your options and understand the requirements to know if now is a good time to refinance. Here are a few key factors to keep in mind:

• Meet the minimum credit score requirements. Research the lender’s credit requirements before applying. If your bankruptcy is recent, your credit score may be too low to qualify. Request your free credit report from AnnualCreditReport.com to check your score and see where you stand.
• Save for closing costs. Refinancing comes with closing costs, typically 3% – 6% of the loan amount. You can roll these costs into your loan, but keep in mind you’ll pay interest on them.
• Document your finances carefully. Be prepared to show detailed financial documentation to demonstrate you’re no longer a high-risk borrower. This may include proof of employment, income verification, and evidence of on-time bill payments.
• Consider getting a letter from your employer. A letter from your employer can serve as a character reference. It may highlight your job stability, length of employment, and positive attributes as an employee.
• Requirements for refinancing a conventional loan may vary. Private lenders can set their own standards. You may be asked for additional documentation. If you’ve had more than one bankruptcy in the last 7 years, you’ll need to wait 5 years from the most recent discharge or dismissal before you can refinance.

How to refinance after bankruptcy

Refinancing after bankruptcy is possible, and it can be empowering. Once you’re eligible, following the right steps can help you secure a loan that fits your financial goals and gives you a fresh start. Here’s a quick step-by-step guide:

• Choose a lender and apply. Get prequalified with multiple lenders to compare rates, terms, and fees. This helps you better understand the options available to you after bankruptcy.
• Choose the right loan. Be cautious when selecting your loan. Focus on interest rates, loan terms, and monthly payments that work with your budget. Government-backed loans, such as FHA and VA loans, often have lower credit score requirements (as low as 580 with Rocket Mortgage®) and may allow for manual underwriting, allowing you to explain your financial history. Learn how your loan-to-value ratio can affect your options.
• Provide documentation. Be ready to submit:
  • Proof of income (W-2s, pay stubs, tax returns)
  • Government-issued ID
  • Two most recent bank statements. If you’re self-employed, refinance requirements may include additional documentation.

• Choose the right loan. Be cautious when selecting your loan. Focus on interest rates, loan terms, and monthly payments.
• Lock in your rate. After applying, you can lock in your interest rate – typically for 30 to 60 days – to protect against market fluctuations.
• Complete underwriting. Your lender will verify your financial information during the underwriting process. This step typically takes a few days to a few weeks.
• Have your home appraised. A refinance appraisal ensures your home’s value supports the new loan. Learn what to expect from a home appraisal.
• Close on the loan. You’ll receive a Closing Disclosure that outlines the loan terms and costs. You must acknowledge receipt before your lender can schedule closing, the final step where you’ll sign documents and complete the refinance.

The bottom line: Refinancing after bankruptcy is difficult but not impossible

Refinancing after bankruptcy comes with challenges, but it’s achievable with the right preparation. Whether you filed Chapter 7 or Chapter 13, you’ll need to meet waiting period requirements that vary by loan type. Government-backed loans, such as FHA and VA, typically offer shorter wait times. Conventional and jumbo loans may require more time and documentation. Focus on rebuilding your credit, understanding lender requirements, and gathering financial documentation to support your application. With patience and persistence, refinancing can help you secure more manageable payments or even access your home’s equity to cover important expenses.

Ready to explore your refinance options? Apply online with Rocket Mortgage or give us a call at (833) 326-6018 to take the next step toward your financial future.