Navigating the complexities of a Chapter 13 bankruptcy in Arizona can be daunting. Among those complexities is your mortgage. Many Arizonans wonder if they can refinance their mortgages to take advantage of lower rates or to take cash out for home improvements or debt consolidations – while they are in a Chapter 13 bankruptcy. The answer is a resounding yes – as long as they meet the required criteria. Let’s explore this in detail, providing clarity and support, so you can make an informed decision.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, often known as a wage earner’s plan, allows individuals with a “regular income” to reorganize and repay their debts. By filing for Chapter 13 bankruptcy protection in Arizona, debtors are able to propose a repayment plan to make installment payments to creditors through the bankruptcy court over a three to five year period. This approach is especially viable for those who aim to retain their assets while managing their debts.
Can You Refinance Your Mortgage While on Chapter 13 Bankruptcy in Arizona?
Yes, refinancing your mortgage during a Chapter 13 bankruptcy in Arizona is not only possible but also more straightforward than you might expect – IF you have a knowledgeable mortgage lender with bankruptcy experience. Refinancing can provide significant financial benefits too, as explained below.
What Are the Mortgage Refinance Options Available During Chapter 13 Bankruptcy?
Mortgage lenders often view a Chapter 13 bankruptcy more favorably than a Chapter 7 because it demonstrates a debtor’s effort to repay their debts, and as a result, more mortgage options are available for borrowers with a Chapter 13 on their records. In any case, conventional loan options, such as those backed by Fannie Mae and Freddie Mac, will not only not allow you to ever refinance while you’re in Chapter 13, and they will make you wait at least two years after your Chapter 13 is discharged before they will allow you to get a conventional loan.
FHA and VA, in sharp contrast, are much more flexible, as both loan programs will allow you to refinance while you are in a Chapter 13 bankruptcy. But, as mentioned above and below, you will have to meet some specific conditions.
What Criteria Must Be Met to Refinance During Chapter 13 Bankruptcy?
To qualify for a mortgage refinance during Chapter 13 bankruptcy in Arizona, the following criteria must be met.
- Court Approval: First and foremost, any refinance during Chapter 13 requires approval from the bankruptcy court. This is to ensure that the new loan terms do not jeopardize your existing repayment plan and are in the best interest of both you and your creditors.
- On-Time Bankruptcy Payment History: Lenders will look to see that you have made at least 12 consecutive months of on-time payments under your current bankruptcy payment plan. This shows them that you are reliable and committed to handling your debts.
- Sufficient Income: You must demonstrate that your income is stable enough to afford the new mortgage payments in addition to your other monthly obligations under the bankruptcy plan. Lenders will thoroughly evaluate your income and employment stability as part of the approval process.
- Credit Score Considerations: While your credit score is likely impacted by the bankruptcy, certain lenders specialize in bankruptcy scenarios and may have more lenient credit requirements. It’s essential to have a clear understanding of how your credit will affect your refinancing options.
- Home Equity: You need to have enough equity in your home to qualify for refinancing. This will be determined through a property appraisal. Having sufficient home equity can not only secure better loan terms but also provide additional funds for consolidating other debts if you opt for a cash-out refinance. The amount of equity you need is discussed below.
- On-Time Mortgage Payments: You must also have a 12-month history of on-time mortgage payments. It is OK if you have “arrearages” or late payments prior to the most recent 12-month period.
- Strong Explanations: Lenders want to see a strong explanation behind your bankruptcy that indicates that it was a one-time event that will not be repeated.
Meeting these requirements can pave the way for a successful refinancing process, facilitated by cooperation between your lender, your bankruptcy attorney, and the bankruptcy court.
What Are the Benefits of Refinancing During Chapter 13 Bankruptcy in Arizona?
The benefits are significant. If you just refinance to lower your rate, you get the benefit of a lower payment and the ability to better manage your finances.
But if you refinance to take cash out, the benefits are tremendous, as you can use the cash for necessary home improvements or to pay off debts within your bankruptcy. Many borrowers are in fact able to completely pay off their entire bankruptcies via a refinance. This has numerous benefits, as it allows them to eliminate their bankruptcy and get back on the path to excellent credit; it raises their credit scores very quickly; and it often significantly lowers their overall payment obligations. Many borrowers see their lives completely turn around solely as a result of a cash out refinance that allowed them to pay off their Chapter 13 bankruptcy.
What Should You Consider Before Refinancing Your Mortgage?
Credit Impact
While filing for Chapter 13 bankruptcy protection negatively impacts your credit, refinancing while in a Chapter 13 bankruptcy can actually improve your credit score – particularly if you pay off debts or pay off the bankruptcy itself. In these situations, you could see your credit scores increase by as much 100 points or more over time.
Closing Costs
Refinancing typically involves various closing costs, which can be rolled into your loan if equity permits and thus minimize or eliminate your out-of-pocket costs. These costs can include title insurance, escrow fees, appraisal fees, underwriting fees, notary fees and more – and can easily get into the several thousand dollar range. Some lenders also offer “no cost” refinancing options where they absorb these costs in exchange for a slightly higher interest rate.
How Does the Mortgage Refinance Process Work During Chapter 13?
The process is similar to a standard refinance but includes some additional steps:
- Ensure all of the eligibility criteria are met – with the help of your lender.
- Ensure you have enough equity – with the help of your lender.
- Complete your full loan application – with the help of your lender.
- Get estimated terms for your loan from your lender.
- Get bankruptcy court approval – with the help of your attorney and lender.
- Order appraisal (lender does this).
- Submit full file for formal underwriting (lender does this).
- Close loan, pay off debts, and re-establish credit.
Frequently Asked Questions
Can refinancing affect my Chapter 13 payment plan?
It might, depending on how your refinanced mortgage impacts your financial situation. It’s vital to consult with your bankruptcy attorney to understand the implications.
How long does the refinancing process take?
The timeline can vary, but generally, from application to closing, it can take a few weeks to a couple of months, contingent on court approvals and other factors. An experienced lender, with the assistance of a skilled attorney, can usually process a full refinance in under 45 days though.
Will refinancing lower my overall debt?
If you are eligible for a cash out refinance, you can consolidate some or all of the debt within your bankruptcy. Your total debt load will remain the same, but your payment obligations can be drastically reduced.
What happens if my credit score is below 580?
If your credit score is below 580, refinancing options may still be available, but loan eligibility could require additional “compensating factors” such as additional equity, lower debt ratios, or an exceptionally strong explanation behind the bankruptcy filing. Working with lenders that specialize in refinancing during or after a bankruptcy can provide you with tailored solutions that take into account all of your issues and concerns, including a less-than-ideal credit score.
How much equity in my home do I need?
To just lower your interest rate, you need very little equity or as little as 3.5% of your home’s value. To get “cash out,” however, you will need an equity cushion of at least 20% after your loan closes. This means that your mortgage, all of the debts you want to pay off and your closing costs cannot exceed 80% of the value of your home.
Next Steps
Refinancing your mortgage during a Chapter 13 bankruptcy in Arizona might seem overwhelming, but with the right guidance, it can be a strategic move toward regaining financial stability. If you are considering refinancing your mortgage, JVM Lending is here to help. With extensive experience in handling such cases, we provide the support and advice you need to navigate your refinancing options effectively.
If you’re ready to explore your refinancing options or simply need more information about how to manage your mortgage during your Chapter 13 bankruptcy, contact JVM Lending at (855) 855-4491 or email [email protected].
