Many of our clients ask us about their chances of obtaining a home refinance after bankruptcy. With a bankruptcy on your record it is true that this will be more difficult but not impossible.
In the following article we show you how to do it and we will answer recurring questions on the topic. You also have the legal support of our bankruptcy lawyers in New York city. Feel free to call us and request a private consultation with our experts.
Why should I want to refinance my home after bankruptcy?
This is the first thing to think about. Although there are several reasons for wanting to refinance your mortgage, the main ones are:
- Get a lower interest rate;
- Lower the amount you pay in the monthly mortgage installments.
Many questions may come to mind:
- Are you now paying an interest rate on your mortgage that is higher than the current interest rate?
- Are you having trouble making ends meet and want to lower your monthly expenses?
- Also, are you trying to consolidate all your debts into one loan?
- Do you need money for repairs?
In this initial stage of doubt it is also a good time to contact our bankruptcy experts located in New York. Do you know your total debt? As finance specialists we can advise you on the best options for your specific case.
Keys to home refinance after bankruptcy in 2021
In many cases, bankruptcy is the only way to get a fresh financial start. In this regard, one of the first things you’ll want to do is refinance your home after bankruptcy.
Note: We have already written about the consequences of filing for bankruptcy in the United States. Bankruptcy will be a short and medium term relief for your debts but there are some long term consequences to be aware of.
Refinancing your home after bankruptcy will be complex and challenging, but not impossible. The first thing will be to know your options, these will be based on:
- The type of bankruptcy filed.
- Type of loan you want. Learn more about personal loans after bankruptcy.
- Your specific situation.
Knowing the rules of refinancing and planning the best time to do it will be key to success.
In the current blog post we are focused on home refinance after bankruptcy. You can read our section on buying a house after bankruptcy if you plan on getting a new house.
Home refinance after bankruptcy in Chapter 7 or 13
There are differences in a bankruptcy of Chapter 7 vs 13 that we have already discussed on our website. Let’s see below how they apply in this case and what the waiting times will be before you can refinance your home after bankruptcy.
Refinance my home under Chapter 7
- Bankruptcy will stay on your credit report for 10 years.
- After debt discharge, you must wait 2 years for government-backed mortgages. For example, a loan from the Federal Housing Administration (FHA).
- It will be a 3-year wait to obtain a USDA loan.
- It will be 4 years of waiting to apply for a conventional home loan. That is, a loan that is not backed by the federal government and meets the limits set by Fannie Mae and Freddie Mac.
Note: This article assumes your knowledge of Chapter 7. If not, check out our complete guide to filing for bankruptcy Chapter 7.
Refinancing My Home Under Chapter 13
- One day after your bankruptcy discharge date, you may qualify for a refinance if you have a government-backed VA loan.
- For a conventional mortgage loan, the waiting period will be 2 years.
Note: Our guide on filing for bankruptcy Chapter 13 will give you all the information you need to know about this chapter.
Chapter 7 vs. 13 conclusions
It is most likely that you will have a harder time getting a refinance under Chapter 7 because:
- You pose a much higher risk as a borrower because you did not reach an agreement with your previous creditors to pay the debt.
- A Chapter 7 bankruptcy stays on your credit report for a longer period. This affects your credit score negatively.
You must show lenders that you are in control of your finances before you can refinance. To do this and to increase your chances of receiving this refinancing:
- Ask your employer for a letter that mentions your excellent performance and long-term potential in the company.
- Keep proof of income and other documentation that shows you pay your bills on time.
Benefits of Home Refinance After Bankruptcy
Refinancing your home after bankruptcy can have several advantages. Here are a few:
- More affordable and manageable payments: By refinancing and accepting a longer term to pay off your loan, you can reduce the monthly amount due. In other words, it will help you avoid going into debt again.
- Lower interest rates: This could save you thousands of dollars over the course of your loan. However, you will not have access to the best interest rates if the previous bankruptcy is still in effect on your credit report.
- Cash to cover debt: Most different types of bankruptcies, including Chapter 7, allow you to keep some type of equity in your home. If you qualify for a cash refinance:
- You will be able to take on a higher principal balance;
- Get the difference in cash from your lender;
- Use that money to pay your debts and improve your credit score faster.
FHA Requirements for Refinancing My Home After Bankruptcy
The Federal Housing Administration (FHA) operates as follows:
- It insures loans from individual lenders. That is, the government is the one who guarantees the loan if the lender cannot recover money from the borrower.
- The waiting period is based on the type of bankruptcy.
- It is crucial to show that you have rebuilt your finances and your credit.
- You also need proof of stable employment and income.
- For a low down payment like 3.5% you will need a credit score of 580. Otherwise you will have to give 10% of the down payment.
U.S. Department of Veterans Affairs
- VA loans are also backed by the government.
- They have the same waiting period as FHA loans.
- If you have filed for Chapter 7 bankruptcy, you must wait at least 2 years from the date of cancellation before you can refinance your VA loan.
- In case of extenuating circumstances, you may only need to wait 1 year.
Private Lender Requirements to Refinance My Home After Bankruptcy
Refinancing your mortgage with private lenders is another alternative. This route offers the following benefits:
- They do not share the same loan criteria as banks.
- Some grant you loans as soon as bankruptcy is in place.
However, you should keep in mind the following:
- The required down payment is usually much higher as you are a higher risk borrower.
- The interest they charge is usually much higher;
- The term for repayment of the loan is usually much shorter.
As you can see, in this case, it is important that the borrower has a solid income and is financially stable.
The process to home refinance after bankruptcy step by step
Now you know some of the requirements and keys to obtain a new mortgage and refinance your home after bankruptcy. Let’s now see the process described in 4 phases.
1. Apply for a refinance
The first thing to do is apply with a lender of your choice. This lender does not have to be the same lender you already have a loan with.
In this first point, consider what your goals are for refinancing your home and compare between lenders. Consider the following:
- Availability: Choose a lender with good customer service and availability. That is, one that is well suited to your job and obligations.
- Minimum loan conditions: Make sure you meet the lender’s minimum credit score standards before applying. It is also more than advisable to meet the standards of equity or debt.
- Fees: These vary by lender. Take the time to choose one with fees and interest rates that suit you.
As soon as you have chosen a lender, apply.
If you have the documentation in order before submitting it, you can speed up the process of refinancing your home. Here are some documents to have on hand:
- Your last 2 W-2 forms.
- Your last 2 payment receipts.
- 2 recent bank statements.
Note: If you are self-employed, the lender will ask you for information. Our NYC small business attorneys can help you. Also, if you are applying for refinancing with another person, such as a spouse, they will require additional information.
2. Set your interest rate
- As a general rule, you can set the interest rate once you complete the mortgage application;
- These rates vary daily so as soon as you set it, the same rate is assured until the refinancing is closed;
- Setting the interest rate protects you against increases that normally occur before closing;
- It will also help you plan your finances after your loans close by keeping your premiums predictable.
Note: Most lenders will allow you to freeze your interest rate for 30 to 60 days. As a general rule, you will have to pay an additional fee to keep the rate fixed for longer.
3. Underwriting And Appraisals
After submitting all documentation, the lender will conduct an underwriting. The goal is to:
- Make sure that you meet the minimum requirements for a refinancing;
- Verify your income.
Most of these evaluations take 1 to 2 weeks although any third party involved in the loan can increase the time.
The lender will also order an appraisal to obtain an estimate of the property’s value. They will need to know that its value has not decreased.
After the completion of the underwriting and appraisal, the lender will schedule a closing meeting. Closing is the time to ask any final questions about the loan, sign the agreement, and finish refinancing your home.
Days before the meeting, the lender will send you what is known as a “closing statement.” This is a document that specifies the terms of the loan and the amount you will pay in closing costs.
Note: You must notify the lender of receipt of the document as they will not be able to schedule the meeting until you have read and accepted the document.
Remember to take these documents with you for closing:
- ID with your photo.
- A check or bank transfer voucher for closing costs.
- Your closing statement.
Note: In case of obtaining a refinance with a cash outlay, you will receive the money in your account a few days after the closing of your new loan.
Helpful Tips for Home Refinance After Bankruptcy
1. Start rebuilding your credit
Generally, you won’t be able to find a lender who will offer to refinance your home right after you discharge your bankruptcy debt.
You will have to wait at least 6 months, enough time to work on rebuilding your credit. The goal is to make it more attractive to lenders:
- Catch up on any late mortgage payments first;
- Pay the rest of the bills on time;
- Open a savings checking account and start building your balances.
Show the lender that you are able to keep up with your payments while saving. That is, you are a person with good financial stability.
Note: You will receive credit card offers in the mail within a few months of the discharge. Be careful if you plan on getting more credit if you can’t make your card payments in full each month. If you accumulate a large balance then it will hurt your credit score again.
Learn how to raise your credit score fast today.
2. Choose the best lender and deal for you
As we mentioned before, here are some things to keep in mind:
- Interest rate;
- Waiting period requirements.
Compare online or call lenders in your local area directly.
Note: If you have trouble finding one that suits you or the offers you are getting have very unfavorable terms, you may want to wait a while. Usually, this is a clear sign that it is not the best moment for you to consider a house refinance.
3. Have all your documentation on hand
Before refinancing your home, make sure you have all the supporting documentation that your lender requires. This may include:
- Bank statements;
- Current documents of your mortgage;
- Recent payment receipts;
- Your Social Security card,
- Tax Returns;
- Any other document related to your bankruptcy filing.
4. Maximize the value of your home
In your refinancing situation after bankruptcy, you may not qualify for preferential interest rates. Accumulating as much equity as possible can help you get the most out of your investment in a refinance loan.
Get the most out of your home with low-cost improvements as you work to improve your credit. Here are some ideas:
- Paint or take care of the garden;
- Add rooms to your home or reform your kitchen.
The idea is to increase the value of the property by spending the least. Be very cautious in this regard.
After your home refinance
As soon as your refinance loan is approved, you should keep working on improving your savings and credit score.
As time goes on, the impact of bankruptcy on your credit will fade.
However, it is highly recommended to be proactive and improve it on your own. The better your score, the lower your interest rate: This is in your interest if you decide to try refinancing your home again later.
Frequently Asked Questions About Home and Mortgage Refinance After Bankruptcy
Questions related to home refinance after bankruptcy are quite common in our office. We have added some of these here.
If you cannot find an answer to your questions or need help with your specific case, contact our experts. With over 30 years of history and hundreds of successful cases behind us, we can advise you efficiently.
Should I Consolidate All My Debt To My Mortgage?
This may not be a good idea. Imagine that you make a 30-year mortgage, that is, you will pay all your debts with interest for 30 years. Consider the following:
Can you imagine paying a 30-year interest-bearing medical bill?
- You could even lose your house if you can’t pay your monthly mortgage payments;
- The more debt you add to your mortgage, the longer the mortgage term will be;
- With more debt, there is also a greater chance of having to pay for mortgage insurance. This would make your monthly payment higher;
- Consolidating all your debts through the mortgage can also cause you to be unable to receive help through bankruptcy.
Realistically, how much can I borrow?
Use the following formula:
- Multiply your gross monthly income by 28%: This is the allowable amount for the home that lenders use in many cases to calculate how much money they can lend to you;
- Calculate what you pay monthly in real estate taxes;
- Divide the total estate taxes you pay per year by 12;
- Do the same with home insurance that you can afford for the month;
- Subtract monthly taxes and insurance from the amount you can pay per month.
This will give you what the lender thinks you can afford per month.
Let’s look at a practical example:
- Gross Income = $1600
- Multiplied .28 (28%) = $448
- Tax ($1200) ÷ 12 = $100
- Insurance ($900) ÷ 12 = $75
- = Monthly Payment: $273
Please note that this is just an example that it cannot be applied to everyone. There are many variables to take into account, among these:
- Perhaps you have higher expenses than normal: transportation, school, medical or utility expenses among others.
- Some lenders will be willing to loan you more money than you can realistically repay.
Should I refinance my mortgage before or after bankruptcy?
This basically depends on 2 factors:
- Possibilities of obtaining approval before and after bankruptcy;
- If you plan to file for Chapter 7 or 13 bankruptcy.
Generally, you want to have the best credit score possible for a refinance. When you ask the bank, you want to seem financially stable. Conventional mortgages can ask for a credit score higher than 620, though some mortgages take scores as low as 580 or even lower.
While a bankruptcy will lower your score, if your score is already below this and you find yourself falling further behind, taking the hit from a bankruptcy to clean your slate and re-work on your credit may be most advisable.
Alternatives to refinancing
There are loss mitigation alternatives to consider:
- Mortgage modification;
- Forbearance Agreement;
- Short sale or deed in lieu of foreclosure in case you are no longer able to remain in the house.
If you anticipate the situation or already have trouble making payments, your lender or servicer will let you know all of your options. At Ortiz & Ortiz our experienced bankruptcy attorneys are at your service in a confidential and personalized consultation.
Why hire the attorneys at Ortiz & Ortiz?
It will take some time and dedication to repair your credit, but you’ve already seen that home refinance after bankruptcy is possible.
Our estate planning New York attorneys can review your case:
- They will let you know what type of home loan is right for you.
- They will guide you through the process of rebuilding your credit.
- You will make sure that mortgage lenders treat you fairly.
Filing for bankruptcy in New York can remove overwhelming amounts of debt without compromising your future as a homeowner.
For more information on obtaining a mortgage after bankruptcy and / or foreclosure, contact us today.