Can You Get a Mortgage Refinance After Bankruptcy?
It’s possible to get a mortgage refinance after bankruptcy — there’s just a longer timeline involved.
Bankruptcy helps consumers struggling with debt management by establishing a new repayment plan or selling their assets to repay what’s owed. The trade-off is a derogatory mark on their credit history — leading to a significantly lower credit score.
Still, going through bankruptcy doesn’t have to exclude you from the potential savings that may come with a refinance.
Understanding Chapter 7 vs. Chapter 13 bankruptcy
Your bankruptcy filing type will ultimately determine how soon you can refinance after bankruptcy. While there are six different types of bankruptcy, the two most common types that apply to individuals are Chapter 7 and Chapter 13. Let’s take a moment to explain the differences between the two.
A Chapter 7 bankruptcy allows you to discharge some of your debts, with the exception of certain debts including student loans, child support and unpaid income taxes. In a Chapter 7 bankruptcy, you’d sell some of your assets to repay your debt, but you may be able to keep your home.
If you file Chapter 7 bankruptcy as a homeowner with a mortgage, you’d have to reaffirm your debt. A reaffirmation of debts is a legal agreement between you and your creditor that holds you responsible for repaying a specific debt during and after bankruptcy.
You must be current on your loan payments to be eligible for a reaffirmation agreement. You must also qualify for a bankruptcy exemption for your home; otherwise, it can be sold to pay off your outstanding debt owed to other creditors.
A Chapter 13 bankruptcy requires you to propose a plan to restructure and pay off your outstanding debt over a period of three to five years. Whatever is owed after the plan is completed is canceled or discharged. You may also be protected from foreclosure during your repayment plan.
Since you’re establishing a repayment plan under Chapter 13 bankruptcy, you typically don’t sell assets to repay your debt. In this case, you can keep your home and potentially catch up on past-due mortgage payments — if applicable — before your lender begins the foreclosure process.
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.
You’ll 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:
1. Determine your waiting period
The main difference with a mortgage refinance after bankruptcy is the time period you’re required to wait after your bankruptcy discharge or dismissal, which varies by loan type.
The table below highlights the waiting periods by loan type for both Chapters 7 and 13.
|Loan type||Chapter 7 waiting period||Chapter 13 waiting period|
|Conventional||2 to 4 years||2 to 4 years|
|Federal Housing Administration (FHA)||1 year||2 years|
|U.S. Department of Agriculture (USDA)||3 years||1 year|
|U.S. Department of Veterans Affairs (VA)||2 years||1 year|
A Chapter 7 bankruptcy typically has a longer waiting period than Chapter 13. Why? Because consumers are already repaying their debt under a Chapter 13 plan, so the requirements aren’t as rigid. You’re restructuring instead of discharging your debt, which proves your ability to continue repaying it.
2. Understand the basic refinance guidelines
Once your waiting period is over, you’ll need to meet the following general requirements to qualify for a mortgage refinance:
- Proof of steady income
- Employment history for the last two years
- Debt-to-income (DTI) ratio of 43% or less
- A 580 credit score for an FHA loan, 620 score for a conventional or VA loan or a 640 score for a USDA loan
3. Apply for a refinance
If you’ve completed your waiting period and meet the general lending requirements, it’s time to apply for a mortgage refinance. Here’s a quick rundown on how to refinance a mortgage:
- Shop around with multiple lenders. Based on recommendations and reviews, identify three to five mortgage lenders and fill out a refinance application with each. To minimize credit score impacts, complete your applications within a 14-day span.
- Choose the best refinance offer. Use the loan estimate you receive from each lender to compare refinance rates and the various costs. Select the offer that best suits your refi goals.
- Lock in your mortgage rate. As soon as the option is available to you, ask for a mortgage rate lock. This way, your rate won’t jump and make your new loan less affordable as you move through the refi process.
- Get your home appraisal-ready. Your lender will order a home appraisal to verify your home’s value, unless you qualify for an appraisal waiver. Make sure your home’s interior and exterior areas are appealing before the appraiser arrives. Plan to be present during the appraisal and point out any improvements you’ve made that can help boost value.
- Close on your new loan. Review your closing disclosure and compare it with your loan estimate to ensure your costs haven’t skyrocketed in the meantime. Once you’ve completed the closing process, your lender will pay off your old mortgage and you’ll begin repaying your new loan.
Alternatives to a refinance after bankruptcy
If you don’t quite meet mortgage refi guidelines but still would like to save money on your mortgage, consider one of the following alternatives:
- Non-QM refinance. If you’d rather not go through the waiting period for a standard refinance, you may qualify for a non-qualified mortgage refinance as soon as the day after completing your bankruptcy. Keep in mind that non-QM loans are typically more expensive than qualified mortgages.
- Mortgage recast. Depending on your lender and whether you have a lump sum of cash, you may be eligible to lower your monthly payments through a mortgage recast. You’d pay your lender a lump sum to reduce your principal balance, often $5,000 to $10,000, and your monthly payments are recalculated based on your reduced principal amount.
- Mortgage modification. If you’re in danger of missing mortgage payments or are already behind, ask your lender about a mortgage modification. A modification makes your loan more affordable by extending your repayment term or lowering your mortgage rate, for example, among other options.
4 tips to financially recover after bankruptcy
It’s wise to use your waiting period to position yourself to qualify for a mortgage refinance after bankruptcy. Consider the following strategies to help you bounce back:
1. Focus on your creditworthiness
Depending on where your credit score started, it could take a 100 to 200-plus point hit once your bankruptcy is reported to the credit bureaus, according to FICO research. Your payment history makes up the biggest chunk of your score at 35%, so it’s crucial to pay your bills early or on time. Additionally, keep your credit account balances low, preferably under 30% of their limit. Keep in mind a Chapter 7 bankruptcy can stay on your credit report for 10 years, while Chapter 13 is reported for up to seven years.
2. Avoid new debt
It’s generally a bad idea to open a new credit card account just to increase your available credit amount. If you do open a new account, however, a secured credit card that reports to the credit bureaus can help you build your credit from scratch. Don’t forget to pay your balance in full each month.
3. Be clear about your purpose for refinancing
When you’re fresh out of bankruptcy, assess the reasons you want to refinance your mortgage. If you’re refinancing to get a lower interest rate that could save you money each month and over time, that’s generally a good move. But if it takes you longer than a few years to recoup what it costs to refinance, it may not make sense to move forward.
4. Scrutinize your budget
Bankruptcy was an option because you were overwhelmed by your debt, which is something you’d want to avoid in the future. Spend some time getting your finances back in order by reviewing your income and expenses. It may make sense to track your spending or establish a budget to control your monthly cash flow. You should also have an emergency fund in place to temporarily cover your expenses in the event of a job loss, unexpected medical bills or another financial setback.