It can be a challenge to get your finances back on track while going through a Chapter 13 bankruptcy. If you have an existing mortgage you’d like to refinance, it can be even more challenging to find a mortgage company that will refinance your mortgage.
The good news is that it is not only possible to refinance your home during a Chapter 13 bankruptcy, it is not that difficult – particularly if you work with a lender that has experience working with borrowers in Chapter 13. You will, however, have to meet some specific criteria.
Here’s everything you need to know about refinancing during Chapter 13 bankruptcy.
What is Chapter 13 Bankruptcy?
As you probably know if you’ve come to this blog, one of the most common types of personal bankruptcy in the United States is a Chapter 13 bankruptcy.
Chapter 13 bankruptcies are also known as “wage earners plans,” and they can enable individuals with regular incomes to set up a plan to repay all or part of their debts over a 3 to 5-year period.
Mortgage Refinance Options During Chapter 13 Bankruptcy
Mortgage lenders look more favorably upon Chapter 13 bankruptcies than Chapter 7 bankruptcies. This is because Chapter 13 bankruptcies indicate that debtors have a willingness to repay all or some of their debts, as opposed to wiping out the debt via a liquidation process.
Conforming loan (Fannie Mae and Freddie Mac) loan guidelines require you to wait two years following a Chapter 13 discharge and four years following a Chapter 7 discharge, before becoming eligible for mortgage financing. But, Federal Housing Authority (FHA) and Veterans Affairs (VA) guidelines are much less stringent. In fact, both offer refinance options to borrowers currently undergoing a Chapter 13 bankruptcy in certain circumstances.
Keep in mind, FHA loans and VA loans are only available for primary residences and VA loans are limited to eligible veterans.
Mortgage Refinance Criteria During Chapter 13 Bankruptcy
Both FHA and VA guidelines are somewhat more stringent for borrowers undergoing a Chapter 13 bankruptcy relative to the guidelines for borrowers who are not underdoing a bankruptcy. Lenders want to see you have righted past financial missteps and are on the path toward solid financial footing.
The following conditions must be met in order to refinance:
- At least 12 months’ worth of payments must have been made per the bankruptcy repayment plan
- A minimum credit score of at least 580 (depending on the loan program)
- You must verify the bankruptcy was a result of a significant, one-time economic event and that steps have been taken to avoid a similar event in the future
- You must obtain permission from the Trustee or Bankruptcy Judge to proceed with the refinance
- You must prove you have sufficient income to meet your housing payments obligations as well as your remaining debt obligations, including your payments to the Trustee
The good news is that lenders can work with your attorney directly to facilitate the bankruptcy court’s approval of your refinance. Typically, the lender sends a copy of the preliminary refinance terms to the bankruptcy attorney for review and submission to the court.
There is no need to be intimidated by any of these requirements though. A qualified lender with bankruptcy experience will walk you through all of the necessary steps, and also help you compose your letter of explanation to convince the court that your situation was truly a one-time event.
Depending on volume, court approval turnaround times usually only take a week or two. Once the court approves your refinance, the lender will proceed with closing.
Benefits to Refinancing
Refinancing can be an excellent option if you are able to satisfy the criteria above. If refinance rates have dropped since you purchased your home or took our last mortgage, a rate, and term refinance will help you take advantage of lower interest rates. This will also result in a lower monthly payment.
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With an FHA loan, you can refinance your loan balance up to 96.5% of the property’s value on a rate and term refinance.
A cash-out refinance, through which you increase the size of your mortgage, can also benefit borrowers during Chapter 13 bankruptcy. You can use the cash to pay off some, or all, of your consolidated debts, and you can use the cash for home improvements as well. FHA allows cash-out refinances up to 80% of your property’s value. If you have sufficient equity, you can in fact use a cash-out refinance to pay off your entire bankruptcy – and get started on reestablishing your good credit altogether.
As an aside, you also must have occupied the property as your primary residence for at least 12 months to qualify for an FHA cash-out refinance. But if you’ve been in a bankruptcy long enough to qualify for an FHA or VA refinance, this requirement is a given.
Mortgage Refinance Considerations
Credit Impact
Declaring Chapter 13 bankruptcy has a negative impact on your credit report, as you probably know. Depending on how much your Chapter 13 filing impacts your credit score, your interest rate could be impacted too – particularly if your credit score falls below 640. The good news is that refinancing will likely not adversely impact your credit to a significant extent, if at all. And, if you have enough equity to pay off your Chapter 13 bankruptcy or to pay off some of your debts, a refinance could actually improve your credit. Additional good news is the fact that FHA and VA interest rates are not as severely impacted by bankruptcies and low credit scores as conforming (Fannie Mae and Freddie Mac) rates are.
Closing Costs
Chapter 13 borrowers should also be aware that there are closing costs associated with every refinance. These costs include title insurance, escrow fees, appraisal fees, notary fees, and underwriting or loan processing fees, among other things.
While these closing costs can add up to several thousand dollars, borrowers should not be disheartened. If there is sufficient equity, it is possible to roll all of your closing costs and funds to close into your loan amount – so you don’t have to bring in any money to close. Lenders can also offer ‘no cost’ refinances with a lender credit to cover non-recurring closing costs, if your loan amount is large enough and if you’re willing to take a slightly higher interest rate.
Additional details on these options are available here.
The Mortgage Refinance Process
Aside from the criteria noted above, a Chapter 13 bankruptcy refinance follows the standard refinance process.
Requirements To Lock In Your Rate
You need to satisfy certain debt-to-income ratio (DTI) and property equity criteria. To do so, you will provide income and credit documents up front, such as pay stubs, W2s, and bank statements.
Prepare For A Home Appraisal
An appraisal will be ordered to confirm your property’s value and that you have sufficient equity. FHA and VA appraisals are slightly more stringent than conforming appraisals, but they are not a cause for concern.
The Bottom Line
Once the appraisal is complete, underwriting approval is obtained, and court approval is secured, your refinance is ready for closing!
While refinancing during a Chapter 13 bankruptcy involves more hoops to jump through than a standard refinance, it can be an excellent option if you are able to satisfy the additional mortgage lender criteria.
A refinance can lower your payments, get you some cash out for home improvements or debt pay-offs, or help you re-establish your credit altogether.
Are you interested in refinancing your home after filing for Chapter 13 bankruptcy?
We’re experts when it comes to bankruptcies, and we can get started on your refinance or even a pre-approval for a purchase today! You can contact us here or give us a call at (855) 855-4491.
JVM Lending currently provides mortgage lending services in the following states: California, Texas, Arizona, Idaho, Tennessee, Florida, Georgia, Oregon, and Massachusetts. More states coming soon.
