Navigating your financial recovery during a Chapter 13 bankruptcy in Tennessee can be daunting, especially if you’re looking to refinance your home. But what happens if you find yourself needing to refinance your mortgage during this period? Is it possible, and if so, how can you successfully navigate this process? The short answer is yes, it is very possible, and we will set out everything you need to know below.
What is Chapter 13 Bankruptcy?
For many residents of Tennessee, filing for Chapter 13 bankruptcy protection is a strategic move to regain control over their financial situation. Unlike a Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, Chapter 13 allows debtors with a “regular income” to reorganize their debts and set up a structured and affordable repayment plan over a three-to-five-year period.
These plans involve making consolidated payments to a Chapter 13 trustee who then distributes the funds to both unsecured and secured creditors like your mortgage and auto lenders.
Can I Refinance My Mortgage While in Chapter 13 Bankruptcy in Tennessee?
As mentioned above, the answer is yes. Refinancing your home while under a Chapter 13 bankruptcy plan is possible in Tennessee. The process, however, comes with specific rules and requirements that need to be meticulously followed to ensure eligibility and success. Working with mortgage specialists experienced in Chapter 13 bankruptcy cases can make the process much easier and vastly increase your odds of a successful outcome.
What Are the Requirements for Refinancing My Mortgage During Chapter 13 Bankruptcy?
To qualify for a refinance during your Chapter 13 bankruptcy proceedings in Tennessee, 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, 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.
What Benefits Does Refinancing Offer During Chapter 13?
The benefits can be enormous. If you can simply lower your rate or extend your term, you can enjoy a lower mortgage payment and the benefits that come with that. But if you have sufficient equity, the much larger benefit comes from a cash-out refinance.
A cash-out refinance allows you to pay off some or all of your consumer debts and bankruptcy altogether, putting you back on the road to financial stability and excellent credit much faster. You can also use the cash to make necessary home improvements.
What Should I Consider Before Refinancing?
The only things you need to consider are the requirements outlined above and whether a refinance will financially benefit you. A refinance will almost always benefit you financially, however, if you can lower interest or take out sufficient cash to pay off a large portion of your consumer debts.
You might also consider the impact on your credit score, but a refinance can often improve your credit score—particularly if the refinance enables you to pay off substantial consumer debts. There are also closing costs to consider, but you will not incur these unless you, your lender, and your attorney deem the refinance beneficial and move ahead with it—at which time, the closing costs can likely be rolled into your loan.
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
Will refinancing affect my Chapter 13 bankruptcy plan?
Depending on your new mortgage terms, refinancing may require adjustments to your repayment plan. It’s crucial to consult with your bankruptcy attorney to understand any potential impacts.
What minimum credit score is required for refinancing during Chapter 13 in Tennessee?
Generally, a minimum credit score of 580 is required for FHA loan programs, which are often used for refinancing in a bankruptcy scenario. This threshold allows more borrowers to qualify for refinancing options, even with a bankruptcy filing on their record. However, better credit scores may provide access to more favorable loan terms and rates. In addition, lenders will also make exceptions for scores under 580 on occasion, if there are compensating factors, such as substantial equity, low debt ratios, and/or a very strong explanation for the bankruptcy.
Are there specific lenders who specialize in refinancing borrowers in Chapter 13 in Tennessee?
Yes, some lenders specialize in working with individuals who are in bankruptcy, just out of bankruptcy, or considering bankruptcy – or all three. After filing Chapter 13 protection in Tennessee, it is particularly important to work with a specialist who understands the intricacies of refinancing while in bankruptcy, as mistakes can cause significant delays and even derail refinances altogether.
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.
How much equity in my home do I need?
To lower your interest rate, you need very little equity, or as little as 3.5% of your home’s value in most cases. 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.
Your Next Steps
Refinancing your mortgage while in Chapter 13 bankruptcy in Tennessee is not only possible but it can also be a strategic and very beneficial financial decision. With the right guidance and a clear understanding of the rules, you cannot only ease your financial burden but also pay off much of your debt or your bankruptcy entirely. And that, of course, would set you on a fast course to excellent credit and a much more stable financial future.
At JVM Lending, we understand the complexities involved with refinancing during a Chapter 13 bankruptcy. Our team of dedicated Chapter 13 mortgage specialists is here to guide you every step of the way.
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 hello@jvmlending.com.
