Navigating your financial recovery during a Chapter 13 bankruptcy in Massachusetts can be daunting, especially if you’re looking to refinance your home. Thankfully, refinancing isn’t just a possibility; it’s achievable with the right guidance and understanding of the process.
If you meet the right criteria, you can refinance to get a lower rate, or to pull cash out to pay off debts or even your entire bankruptcy. We will explain more below.
What Exactly is Chapter 13 Bankruptcy in Massachusetts?
Chapter 13 bankruptcy, often referred to as a “wage earner’s plan,” allows individuals with regular incomes in Massachusetts to develop a plan to repay all or part of their debts. During this process, debtors propose a repayment plan to make installments to creditors over a three-to-five-year period. Filing Chapter 13 bankruptcy in Massachusetts can provide a structured path to financial recovery while still retaining your assets.
Can I Refinance My Mortgage While in Chapter 13 Bankruptcy in Massachusetts?
Yes, it’s possible to refinance your mortgage while you’re in Chapter 13 bankruptcy—and that is the point of this blog. Refinancing may seem out of reach for someone in bankruptcy, but with the right approach and the assistance of a lender with experience with Chapter 13 bankruptcies, refinancing is both viable and more common than most people realize.
What Are the Benefits of Refinancing While In Chapter 13?
One possible benefit is simply getting a lower rate or a longer term to make your mortgage payments more manageable—which will in turn allow you to manage your other expenses more comfortably.
But the more significant benefit comes from pulling cash out of your home to pay off debts within your bankruptcy or to pay off your bankruptcy altogether! This requires more equity (discussed below), but it can put you back on the path to excellent credit and financial stability much faster.
What Are the Mortgage Refinance Options Available During Chapter 13?
Mortgage lenders typically view a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy because it shows an effort and a willingness to repay debts. Conventional loan programs, like those backed by Fannie Mae and Freddie Mac, do not allow borrowers to ever refinance while they are in bankruptcy.
They even require you to wait two full years from discharge before you can get another conventional loan. However, FHA and VA are far more lenient. They both allow you to obtain mortgage financing (for a refinance or a purchase) while you are in bankruptcy—as long as you meet some specific conditions.
What Do I Need to Qualify for a Refinance During Chapter 13?
To qualify for a refinance during Chapter 13 in Massachusetts, you must meet specific criteria including the following:
- At least 12 months of timely payments to your bankruptcy trustee, as per your bankruptcy plan.
- At least 12 months of timely mortgage payments (it is OK if you had late payments prior to the 12-month period).
- A minimum credit score of 580 is required, but lenders can sometimes accommodate lower scores if there are “compensating factors.”
- Approval from the bankruptcy court.
- Sufficient income to cover your housing payment and other debt obligations.
- Evidence that the bankruptcy was caused by significant, uncontrollable life events, with steps taken to prevent future occurrences.
There is no need to be intimidated by these criteria; if you are working with a lender with bankruptcy experience, they will help you navigate all of this.
Are There Any Risks or Considerations in Refinancing During Chapter 13?
While refinancing can be beneficial, there are some minor considerations.
- Credit Impact: Refinancing could adversely impact your credit score, but it is more likely that it will improve your credit score – particularly if you are able to use cash out proceeds to pay off consumer debts.
- Closing Costs: Refinancing involves various fees, but these can often be incorporated into your loan to avoid having to pay them “out of pocket.”
- Court and Trustee Approval: You’ll need approval from the bankruptcy court and your trustee, which involves detailed documentation and possibly legal fees. This is, however, more of a reminder than a risk.
What Are The Steps I Need to Take to Refinance?
Here is a rough outline of the necessary steps.
- Find a qualified lender with tremendous bankruptcy experience.
- 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 repayment plan?
It might, depending on how the refinance impacts your financial situation. Always consult with your bankruptcy attorney before making changes to your financial commitments.
What if my credit score is below 580?
Many lenders have a minimum credit score requirement of 580, but many lenders will also make exceptions for even lower scores if there are “compensating factors,” like very low debt ratios, substantial equity in your home, or a very strong explanation behind the bankruptcy.
How long does the refinancing process take during bankruptcy?
The timeline can vary, but typically it takes a few weeks to a couple of months, including the time needed for court approval. With the assistance of an experienced lender, the entire process can often be completed as fast as 45 days, but it depends on how fast the courts move.
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.
Can I refinance my mortgage to pay off the tax debt included in my Chapter 13 bankruptcy?
Yes, if you have significant equity in your home, a cash-out refinance might allow you to use the equity to pay off tax debts consolidated under your Chapter 13 repayment plan. This is contingent upon court approval, as all significant financial decisions during bankruptcy must be overseen by your bankruptcy trustee. Make sure the refinance offers a financial advantage, such as a lower interest rate or reduced overall monthly debts.
Next Steps
Refinancing your home while navigating Chapter 13 bankruptcy in Massachusetts can be a strategic decision that aids in your financial recovery. By choosing a knowledgeable and supportive lender like JVM Lending, you can explore your options thoroughly and move towards a more secure financial future. We’re here to help you understand your options and facilitate a smooth refinancing process.
If you’re ready to explore your refinancing options or simply need more information about managing your mortgage during your Chapter 13 bankruptcy, contact JVM Lending at (855) 855-4491 or email [email protected].
