Refinancing after Bankruptcy

by David Sandberg

Bankruptcy can give you a fresh start and help you to get out from under crushing debt payments. Unfortunately, using this option makes lenders wary of you. As such, if you take advantage of bankruptcy as a way to clear out an unsurmountable mountain of debt, you may find it hard to get a refinance. However, just because it is hard does not mean that it is impossible.

Wait for the Bankruptcy to Clear

The law is very simple. The credit bureaus must remove your bankruptcy from your credit report 10 years after your original filing date, although they may remove a Chapter 13 reorganization bankruptcy after 7 years. If you can wait that long to refinance, your credit report will make no mention of any bankruptcy. Assuming that your credit improved in the 10 years after your bankruptcy, you should be able to get a favorable loan.

Of course, if you cannot wait for your bankruptcy to clear from your credit record, you will need to refinance with your bankruptcy still on your record. There are a number of different options available for you.

General Principles

There are a few general rules that you can follow that will help you with any type of mortgage refinancing. Doing the right things after your bankruptcy will make it easier for you to refinance, regardless of what type of loan you need to replace:

  • Make all of your post-bankruptcy payments on time to build your credit score.
  • If possible, establish new credit history through taking out such thing as secured cards and using them appropriately. To do this, keep the card’s balance at no more than 20 percent of its credit line and pay it off every month.
  • Shop around for your loan. While a program may be generous, a lender’s internal policies may be stingier. If Bank A will not offer you a good refinance mortgage, Bank B or C might.
  • Be prepared to pay a little bit more. A bank may charge you a slightly higher rate to refinance your mortgage because of your bankruptcy. An ethical mortgage broker will help you distinguish between gouging and a reasonable premium.

VA Streamline Refinancing

Veterans and active duty military personnel who have taken out a mortgage through the VA program benefited from relaxed qualification guidelines. These guidelines carry forward to how they treat people who have bankruptcies. While a “normal” borrower needs to wait 10 years for a bankruptcy to drop off of their credit report, the VA will disregard a bankruptcy after five years. In addition, if you filed bankruptcy three to five years ago, lenders are required to give your application serious consideration, although getting approved may be more challenging. If you filed bankruptcy within the last three years, the VA will allow lenders to give you a mortgage, but it may be hard to find one that is willing.

FHA Streamline

The FHA has relatively lax rules that vary depending on your particular situation. You should be eligible for an FHA refinance just two years after a Chapter 7 or 13 bankruptcy if you meet the FHA’s other standards for credit score and debt-to-income ratio. In some cases where your bankruptcy was caused by factors outside of your control, such as a natural disaster or serious illness, you can be eligible for an FHA loan after 12 months.

Refinancing Other Mortgages

Following the principles outlined above will help you to refinance if you do not fit into any of these categories. The good news is that there are no laws preventing lenders from offering you a refinance if you have filed bankruptcy. While some borrowers have reported refinancing their loans as little as six months after a bankruptcy, a two to three year wait is more common. One secret to getting a mortgage refinance after a bankruptcy is to have healthy equity. While FHA, VA and HARP refinance loans can help borrowers with little equity, traditional lenders like to see a loan-to-value ratio of 70 percent or less. This means that you can effectively borrow no more that $140,000 on a $200,000 home.

Bankruptcy is a fresh start, not an ending. With good strategy, you can not only use a bankruptcy to save you a great deal of money but also position you for future savings in the future. Working closely with your bankruptcy attorney and with an experienced loan broker will increase the chances that you can successfully refinance your mortgage in the future.

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