How Long After Bankruptcy Can You Refinance?
If you've recently gotten out of bankruptcy, refinancing your mortgage might seem out of the question. But you might not have to wait as long as you think to potentially lower your mortgage payments or snag a lower interest rate. Here's what you need to know about refinancing waiting periods.
What Happens to Your Mortgage When You Declare Bankruptcy?
Before you think about refinancing your mortgage, understand how the type of bankruptcy you filed impacts your finances. There are two common types of personal bankruptcy.
Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 bankruptcy involves selling off your assets to pay back your outstanding debts. If you have significant equity in your home, it may be sold. It's possible to keep the property during bankruptcy, but the lender retains a lien on it, meaning you have to keep making payments on the loan or the lender could foreclose on it.
[Read: Best Mortgage Refinance Lenders.]
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also called a reorganization bankruptcy or a wage earner's plan, as it's usually filed by borrowers who have regular income and can afford to repay at least some of their debt over time. Instead of using assets to pay off their debt, borrowers can keep their property and enter into a repayment plan. That means you're likely to keep your home if you file for Chapter 13 bankruptcy protection.
How Soon Can You Refinance Your Home After Chapter 7 or 13 Bankruptcy?
The type of bankruptcy you file will impact how long you have to wait before you're eligible to refinance your mortgage. Though you are refinancing existing mortgage debt, the process involves taking out a new loan, so you'll essentially be subject to the same rules as you would for a new mortgage after bankruptcy.
"Chapter 7 has a longer waiting period before someone can get a home loan," says Benie Khan, CEO and operations manager at FedHome Loan Centers, which specializes in providing home loans to individuals with bankruptcies. Chapter 13 bankruptcy usually requires a shorter waiting period, though Khan notes each loan type has different requirements.
See below for refinancing waiting periods by type of loan after Chapter 7 bankruptcy.
Federal Housing Administration loans: Government-backed loans, such as FHA loans, require that you wait at least two years from your Chapter 7 bankruptcy discharge date before refinancing. A discharge is a court order that prevents creditors from collecting qualifying debts.
However, if you can show that you filed for bankruptcy due to circumstances out of your control and have since been able to handle all of your financial responsibilities, that waiting period may decrease to one year. For example, if your family's primary wage earner died or was seriously ill, you may qualify sooner.
Department of Veterans Affairs loans: Since VA loans are also government-backed, they have the same waiting period as FHA loans. If you filed for Chapter 7 bankruptcy protection, you must wait at least two years from the discharge date before you can refinance your VA loan. If there were extenuating circumstances, you may only have to wait one year.
Conventional mortgages: In most cases, you must wait four years from your bankruptcy discharge date before you can apply for conventional mortgage refinancing if you filed for Chapter 7 bankruptcy protection. Under extenuating circumstances, however, that waiting period may decrease to two years. Unlike FHA or VA loans, conventional loans don't come with a government guarantee, which means they're considered a higher risk for lenders. Therefore, the interest rates and credit score requirements may be higher, too.
[Read: Best FHA Loans.]
Here's how long you have to wait to refinance after Chapter 13 bankruptcy.
FHA loans: You'll need to wait at least a year from the start of your payout period under Chapter 13 bankruptcy before you can apply for refinancing with an FHA loan. However, you must prove you made all your bankruptcy payments in full and on time during that year.
VA loans: The waiting period to refinance a VA loan after Chapter 13 bankruptcy is based on your filing date, not your discharge date. It's possible to refinance a VA loan one year after the filing date.
Conventional mortgages: The waiting period for Chapter 13 bankruptcy will depend on whether your case was discharged or dismissed. In the case of dismissal, which doesn't prevent creditors from collecting qualifying debts, you must wait at least four years to refinance, though under extenuating circumstances, you only need to wait two years. If your case was discharged, the waiting period is shortened to two years, regardless of the circumstances.
If you have filed more than one bankruptcy within the past seven years, you have to wait five years before you can qualify for any type of home loan, including refinancing. This is true whether you filed under Chapter 7 or Chapter 13.
Once that waiting period is up, you'll need to meet the same qualifications for a mortgage as any other borrower.
Keep in mind that these waiting periods are only the minimum. Since you are also subject to the lending requirements of individual banks, you may need to wait longer before you're eligible to refinance according to their standards.
And if you're under Chapter 13 bankruptcy protection, you will need approval from the bankruptcy court and trustee to refinance, even if the lender approves refinancing. This ensures you're not taking on too much of a financial obligation while you're still paying on bankruptcy debts.
[Read: Best VA Loans.]
You might be able to find lenders that offer to refinance with a shorter post-bankruptcy waiting period than what's required for VA, FHA or conventional mortgages. "There are subprime lenders who offer the ability to refinance or purchase a home just one day from when the bankruptcy has been discharged," says Eric Jeanette, owner of Dream Home Financing, a mortgage lending marketplace.
But you should expect to pay for the privilege of refinancing outside of normal waiting periods: These loans may come with higher costs. If you've already been through a bankruptcy, it's generally not a good idea to take on an expensive loan.
Rebuilding Your Credit After Bankruptcy
Though you may have to wait to refinance after bankruptcy, that time can give you an opportunity to get your finances in order.
Getting approved for refinancing requires much more than simply waiting -- you also need to reestablish credit, Khan says. "This means having open credit cards and loans that have been paid on time, as well as no collections or charge offs after the bankruptcy."
In other words, you need to prove to lenders that the bankruptcy won't happen again.
"Your credit score will determine what your interest rate would be and also the maximum loan to value (ratio) the lender will allow," Jeanette says. So before you apply for refinancing, work on getting your credit in shape.
Casey Bond is a seasoned personal finance writer and editor. Her work has appeared in a number of major national publications including U.S. News & World Report, Yahoo Finance, MSN, The Huffington Post, Business Insider, Forbes and others. Follow her on Twitter @CaseyLynnBond.
