What To Know About A Refinance After Bankruptcy

A bankruptcy impacts your financial options, which includes your mortgage refinancing opportunities because a bankruptcy includes all your debt (and a mortgage, if you have one at the time of bankruptcy). But it’s still possible to refinance after bankruptcy. If you want to take advantage of the financial benefits a refinance can offer, you are in the right place. We’ll explore how a past bankruptcy might affect your refinancing options; however, please understand that your best resource for any information about a bankruptcy is a bankruptcy attorney.

Can You Refinance A Mortgage After Bankruptcy?

A refinance involves taking out a new mortgage loan with a different interest rate or term to better suit your financial situation. When you take out this new loan, you’ll pay off your existing mortgage loan.

For most, it’s possible to refinance your mortgage after bankruptcy. However, it will likely take a few years of waiting and working on your credit score before you’ll qualify.

Understanding The Types Of Bankruptcies

When facing financial difficulties, there are different types of bankruptcies to consider. Chapter 7 and Chapter 13 are two of the most common types of bankruptcy.

Chapter 7 Vs. Chapter 13 Bankruptcies

One of the major differences between these two types of bankruptcy is whether or not your assets are liquidated. When pursuing a Chapter 7 bankruptcy, assets are sold to repay your creditors. But a Chapter 13 bankruptcy reorganizes your debt into a repayment plan, often scheduled for 3 to 5 years. In this case, you might not have to liquidate your assets to repay the creditors.

Understanding Your Waiting Period

Regardless of the bankruptcy you pursue, lenders will enforce a waiting period between your bankruptcy and a potential refinance. The length of the waiting period depends on the type of home loan you want to refinance. As of October 2022, these are the waiting periods based on loan product:

What To Consider When Refinancing After Bankruptcy

A bankruptcy can derail your financial plans. In some cases, a refinance can help you get back on track. But like all financial decisions, refinancing after bankruptcy comes with some advantages and disadvantages to consider.

Pros of Refinancing After Bankruptcy

Refinancing your mortgage can help you tap into several pros, including:

• Lower your interest rates: A lower interest rate might help you save thousands over the life of your loan.
• Adjust your loan term: If you aren’t happy with the length of your mortgage, you can change the timeline to suit your goals. Lengthening the loan term may lead to lower monthly payments while shortening the loan term will help you get out of debt faster.
• Use your equity to pay your debts: A refinance can give you access to the equity you’ve built in your home. Depending on your situation, access to these funds can help you pay off your debts.
• Lower your monthly payments: A lower mortgage payment can offer any budget some relief. A refinance might accomplish this goal by lowering your interest rate, increasing your loan term, or both.

Cons of Refinancing After Bankruptcy

Of course, there are also some cons to refinancing after bankruptcy. A few include:

• Still need to meet the minimum credit score requirements: Mortgage lenders won’t finalize your new mortgage loan unless you meet specific credit score requirements.
• Still need to save for closing costs: When you refinance, closing costs are unavoidable. The need to save thousands of dollars to cover closing costs might be a dealbreaker.
• Detailed record keeping: Borrowers must have thorough and accurate records and correct bankruptcy documents to move through the refinancing process painlessly.

How To Refinance After Bankruptcy

Before moving forward with a refinance, you’ll need to make sure your waiting period is over and you meet the general refinance requirements.

Once you reach that point, here’s how to pursue a refinance.

1. Compare Lenders And Loan Types

The first step is to consider all of the loan types available to you. A few include the VA loan, USDA loan, conventional loan, and FHA loan. As a borrower, government-backed loan programs might be attractive due to the less stringent credit score requirements. Explore each of the loan types to determine which one you might qualify for.

After you nail down the type of loan you want, it’s time to compare lenders. At this point, it’s key to shop around for the best deal on the market. A few minutes of comparison shopping could lead to significant savings.

2. Apply For A Refinance

When you have a lender in mind, you can move forward with your refinance application. For a smooth application, gather these documents ahead of time:

• Pay stubs
• W-2s
• Bank statements
• Tax returns

Although the lender might ask for more information, these documents offer a good place to start.

3. Submit To Underwriting

Once you submit all of your documents, the lender moves into the underwriting stage. Throughout this process, the lender confirms your ability to repay the loan. Typically this process will take 1 or 2 weeks.

Be prepared to answer questions from your mortgage lender throughout the underwriting process. They might ask about everything from your income sources to where you obtained the funds for a down payment.

4. Get A Home Appraisal

During the refinancing process, the lender may order a home appraisal. The goal of this appraisal is to confirm the value of your home. Typically, the lender wants to ensure they aren’t lending more than the home is worth.

If possible, prepare your home for appraisal by cleaning your home before the appraiser arrives. Also, it’s helpful to finish up any small home projects that might impact the home’s value.

5. Close On The New Loan

When underwriting is complete, the lender will meet you at the closing table. Before closing, you’ll receive a Closing Disclosure, which details exactly how much money you’ll need to bring to closing.  During the closing, you will sign on the dotted line to finalize the new loan agreement.

Alternatives To Refinancing After Bankruptcy

A refinance after bankruptcy isn’t always the right move. Here is an alternative to keep in mind.

• Mortgage recast: A mortgage recast involves making a large lump sum payment toward your mortgage principal. The result is a lower monthly payment and savings on interest costs over the life of the loan.

The Bottom Line

Refinancing after bankruptcy isn’t always easy. But with some major dedication to improving your credit score, a refinance could be in the cards for you. If you are ready to move forward with a refinance, get started online today.