If you’re one of the many individuals who have recently navigated the challenging process of bankruptcy, you might be wondering about the possibility of borrowing against your home equity. While bankruptcy can create significant financial roadblocks, securing a home equity loan after bankruptcy isn’t out of reach and can be a practical step toward regaining financial stability.
Can You Get a Home Equity Loan After Bankruptcy?
Bankruptcy impacts your credit score and financial records, but it doesn’t permanently eliminate your chances of securing a home loan. Both Chapter 7 and Chapter 13 bankruptcies have distinct impacts on your future borrowing capabilities. Here’s how they differ in terms of future home equity loans:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves liquidating your assets to pay off debts. Although it can drastically reduce your debt load, it also leaves a lasting mark on your credit report for up to ten years. However, if you retain homeownership and have sufficient equity in your home, you might still be eligible for a home equity loan. Lenders will likely require a “seasoning” period after your bankruptcy though; they will want to see that you’ve rebuilt your credit and re-established yourself financially.
Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 involves reorganizing debts and setting up a repayment plan, usually lasting three to five years. If you successfully complete the repayment plan, lenders might view this type of bankruptcy more favorably. It remains on your credit report for up to seven years, but there are some loans borrowers can obtain while they are IN Chapter 13. In addition, the seasoning periods after someone is out of Chapter 13 tend to be shorter than the Chapter 7 seasoning period.
What Does Bankruptcy Mean for Your Financial Options?
As mentioned above, bankruptcy remains on your credit report for 7 to 10 years, depending on the type of bankruptcy and your situation. Bankruptcies should be considered a fresh start though and not the end of your financial journey. You can definitely still obtain mortgage loans after your bankruptcy. You will, however, just need to wait for the required seasoning period and re-establish your credit.
Is Tapping into Home Equity Possible Post-Bankruptcy?
Yes, accessing home equity post-bankruptcy can be a viable option. The methods to do this include cash-out refinancing, home equity loans, and Home Equity Lines of Credit (HELOCs). Each option has its merits and prerequisites, such as sufficient equity, satisfactory credit scores, and debt-to-income ratios.
Cash-out refinancing typically involves taking out a new first mortgage that is larger than your second mortgage, while home equity lines are typically fixed-rate lump sum second mortgages (behind your first), and HELOCs are variable-rate second mortgages that are revolving lines of credit.
Cash out first mortgages typically require equity cushions of 20% or more. And home equity loans and HELOCs require as little as 5% equity cushions. Home equity loans and HELOCs, however, typically come with higher interest rates than cash-out first mortgages.
How Long Must You Wait After Bankruptcy to Secure a Home Equity Loan?
The waiting period after bankruptcy before you can secure a home equity loan varies. It generally ranges from one to seven years from discharge, based on the type of bankruptcy filed and the specific type of mortgage you’re considering. Lenders require a waiting period because they want to see that you have re-established yourself properly and set yourself back on sound financial footing.
Can I Get a Home Equity Loan After a Chapter 7 Discharge?
Obtaining a home equity loan after a Chapter 7 bankruptcy discharge can be challenging but not impossible. You will have to re-establish credit and wait at least two years if you want a cash-out first mortgage with an FHA loan. But you will have to wait at least four years if you want a home equity line of credit or a HELOC.
What About After Chapter 13 Bankruptcy?
Post-Chapter 13, the scenario looks slightly different. Since this bankruptcy type involves a repayment plan, your commitment to this plan and its successful conclusion can positively influence lenders. You will have to re-establish credit and wait only one year if you want a cash-out first mortgage with an FHA loan. But you will have to wait at least two years if you want a home equity line of credit or a HELOC.
What Are the Risks and Benefits of Using Home Equity After Bankruptcy?
Benefits:
- Lower Interest Rates: Home equity loans typically offer lower rates than personal loans and credit cards.
- Higher Borrowing Limits: The amount you can borrow is usually greater, depending on your home’s equity.
- Diverse Uses: Funds can be used for home improvements, debt consolidation, or tuition.
- Tax Deductions: Potential deductions for interest paid on home improvement loans.
Risks:
- Risk of Foreclosure: Failing to meet payment obligations can lead to losing your home.
- Equity Reduction: Borrowing against your home equity diminishes this asset, which can take years to rebuild.
- Potential for Negative Equity: If property values drop, you could owe more than your home is worth.
- Additional Costs: Closing costs and other fees can be higher than those associated with consumer loans.
What Should You Consider Before Applying for a Home Equity Loan?
Before deciding to tap into your home equity, consider your long-term financial goals and the potential risks. You should also discuss your options with a mortgage company that has substantial experience with bankruptcies, as there are many nuances to take into account when trying to find the best mortgage option.
Frequently Asked Questions
Can I get a home equity loan while I am in Chapter 13?
Yes, you can get a mortgage loan, but only a cash-out FHA first mortgage. You cannot get a HELOC or a conventional loan. To get an FHA mortgage while you are in a Chapter 13, though, you will need to meet specific criteria, including proof that you have made at least twelve timely payments to your bankruptcy trustee. You can read about all of the criteria here.
Can I get a home equity loan after Chapter 13?
Yes, following a successful repayment plan and if you have rebuilt your credit, you can get a new first mortgage one year after your discharge. You can also get a HELOC as soon as two years after your Chapter 13 discharge.
Is it possible to ever get a home equity loan immediately after my bankruptcy discharge with no waiting period?
The only types of loans you can get immediately after a bankruptcy are hard money and non-QM loans that require substantial equity cushions or down payments of at least 35% to 40%. The interest rates and fees are much higher too.
What is the waiting period for a home equity loan after Chapter 7?
Typically, you’ll need to wait about 2-6 years, depending on how quickly you can rebuild your credit and financial stability and on what type of loan you are seeking. As mentioned above, FHA first mortgage loans offer the most flexibility with waiting periods of only two years.
How Can JVM Lending Help You?
Navigating the complexities of home equity loans post-bankruptcy can be daunting. At JVM Lending, we understand the nuances of the financial challenges facing borrowers after a bankruptcy. That is why we specialize in helping borrowers in that situation. Our team of experts will work with you to explore all possible options, ensuring that you choose the right path to financial recovery without the pressure of a hard sell.
Embarking on a journey to secure a home equity loan after bankruptcy requires careful planning and a clear understanding of your financial landscape and all of your options. By assessing your situation thoroughly and choosing the right lending partner, you can navigate this path with confidence. At JVM Lending, we take enormous pride in our ability to help borrowers get the best possible mortgage no matter what their situation is.
If you’re ready to explore your home equity loan options or simply need more information about getting a mortgage during bankruptcy, contact JVM Lending at (855) 855-4491 or email [email protected].
