Can You Get a Home Equity Loan After Bankruptcy?
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If you’ve filed for bankruptcy in the past, you might be wondering if you’re eligible to take out a home equity loan. A home equity loan is typically a strong borrowing option for homeowners because they tend to offer lower interest rates than unsecured debts, like credit cards or a personal loan. The good news for people who’ve had prior bankruptcies is that it might still be possible to take out a home equity loan, depending on which lender you use.
Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry says lenders have more flexibility when approving borrowers for a HELOC. Unlike a mortgage, there are no set underwriting guidelines from Fannie and Freddie to follow.
Each bank is using their own money for these loans, and they have their own rules, he told LendingTree.
How to get a home equity loan after bankruptcy
Keep in mind, a bankruptcy can remain your credit report for up to 10 years and seriously drag down your credit score, which might hinder your ability to qualify for a HEL. If you want to improve your odds of getting approved before that 10-year waiting period is up, start working as soon as possible on improving your score. You might qualify for a secured loan or a credit builder loan, which can help, and paying down any lingering debts can also never hurt.
It’s at the lender’s discretion whether or not to extend a loan to you if a bankruptcy is still on your record.
If you need to get a HELOC quickly after bankruptcy, Crouse says a good place to start is with your local credit union. Each bank will treat HELOC applicants with prior bankruptcies on a case-by-case basis, so you should consider speaking to several banks to understand what options are available to you.
The length of time that it will take you to reestablish credit after bankruptcy and be eligible to apply for loans varies depending on the type of loan you want to get, how much you want to take out and who your lender is. According to a 2009 white paper entitled Forgive and Forget: Who Gets Credit after Bankruptcy and Why, 90% of individuals have access to some sort of credit within 18 months after filing for bankruptcy.
Expect to wait at least 3 years after your bankruptcy is discharged
We asked representatives from lenders in the LendingTree home equity loan marketplace to share their policies on working with borrowers with bankruptcies.
An aggressive lender that issues many HELs might allow a borrower to qualify just three years after bankruptcy. But the most common answer we received was a waiting period of five to six years from the time the bankruptcy was discharged.
In general, if you go to a bank to apply for a HELOC shortly after bankruptcy you’re going to hear the word no. Thirty-six months is probably the least amount of time before applying for a HELOC but it could be as much as six or seven years.
A spokesperson for J.P. Morgan Chase, for example, told us that customers are generally eligible for a Chase home equity loan 84 months after the bankruptcy has been discharged.
It’s important to keep in mind that just because you might be eligible for a home equity loan after bankruptcy doesn’t mean it’s the best financial option for you. If you have a history of bankruptcies, you might have bigger cash flow issues at hand that need to be resolved before taking on more debt.
Take the time to evaluate why you feel you need an additional loan. Make sure you’ve considered all other options, including paying for what you want in cash. Sometimes it’s better to take the time to save for what you want over a period of a few months or years, rather than take out a lump-sum loan â€” especially if you’ve proven to have issues making debt payments on time in the past.
Consider this: Although home equity loans do offer many benefits, at the end of the day, you’re putting your home at stake and you could lose it if you fail to repay the debt in time.
If you’re still willing to take one out after weighing the pros and cons and understanding the risks, below is some more information about the process.
How much you can borrow
With both a home equity loan and a HELOC, your home acts as collateral and you need to have a certain amount of equity in your home to qualify, typically at least 20%. How much you can borrow based on that equity is for the lender to decide.
For borrowers without a bankruptcy on their records, they may be able to get a HELOC for up to 100% of their home’s value. The situation is very different for borrowers with past bankruptcies. Chase’s spokesperson says people with bankruptcies on their records are allowed to borrow up to a maximum of 80% of the home’s value (after that 84-month waiting period, that is).
It’s important to explain to the lender why you had to declare bankruptcy.
Bankruptcy from consumer debt is different from declaring bankruptcy due to illness or a family status change. Wherever you apply, it’s important to have a human on the other side who can take personal situations into account when making a decision about whether or not to offer you a HELOC and your eligibility requirements to get one.
A quick primer on HELs/HELOCs
With a home equity loan, you apply for a loan that you get in a lump sum and pay back over time. A HELOC, on the other hand, acts like a credit card. You’re given a certain line of credit that you can draw on over a set period of time. You don’t have to use the entire credit line â€” you only get charged interest on what you borrow. And, like a credit card, you can tap into it when you need to.
Interest rates for a home equity loan are typically fixed. You make the same payment each month. For a HELOC, the interest rate can be varied. Keep in mind that with either option, you’re using your home as collateral which can put it at risk if you can’t make your payments. At the time of this writing, home equity loan rates are between 3.94%-7.14%, depending on the size of your loan and your credit history.
Borrowing after Chapter 7 bankruptcy
When you file a Chapter 7 bankruptcy, you’re seeking relief from your debt. Whether you can’t make your payments or you’re simply tired of debt collectors calling you all the time, a Chapter 7 bankruptcy is typically an option for people who can’t see any other way out of their debt.
Once all your debt is discharged, debt collectors cannot call you anymore. However, you will have to give up all nonexempt assets to pay your creditor like clothing, jewelry or artwork. The number of exempt assets you can claim will depend on where you live, what they’re worth and more.
Many people wonder if they can keep their home as an exempt asset with a Chapter 7 bankruptcy. According to an article by bankruptcy attorney Cara O’Neill, it’s possible under certain circumstances:
- Whether or not your mortgage payments are up to date.
- If you’ll be able to make your monthly payments as usual after bankruptcy.
- How much equity is in your home.
According to O’Neill, the less equity you have in your home, the better when it comes to a Chapter 7 bankruptcy. That’s because a trustee can’t get any value from a home with no equity to give to your debt collectors.
That could be great if you’re filing Chapter 7 and want to keep your home. But low equity could also hurt your chances of qualifying for a HELOC or HEL later on.
When it comes to a getting a home equity loan specifically after a Chapter 7 bankruptcy, the primary requirement is that you need to own a home that has equity in it. How much will depend on the lender. It will also be up to the lender to decide whether or not you’re eligible for a home equity loan and what the terms might be.
However, If you don’t own your home or you lost your home during your Chapter 7 bankruptcy, you can apply for a conventional mortgage four years after, an FHA loan and VA loan two years after and a USDA mortgage three years after the bankruptcy. Once you’ve spent time building equity in your home after waiting to own one, you can then compare your options for a home equity loan.
Borrowing after Chapter 13 bankruptcy
If you’re someone who is working and has a regular income but is unable to pay back your debt, a Chapter 13 bankruptcy might be right for you. With a Chapter 13 bankruptcy, you can potentially keep certain assets, like your house, but you have to file a repayment plan and get the court’s approval first.
Unlike a Chapter 7 bankruptcy where your qualifying debts are wiped clean, with a Chapter 13 bankruptcy, you work with a trustee to develop a plan to pay back debts within three to five years. You agree to make regular payments, which are distributed to the creditors you owe.
If you don’t have a home, you can apply for a conventional mortgage four years from your bankruptcy dismissal date (or two years from your discharge date.) You can apply for an FHA loan, VA loan and USDA loan one year after a Chapter 13 bankruptcy.
If you do have a home and you meet the qualifications to keep it in your state, you have to continue making your mortgage and insurance payments throughout the process. According to the U.S. Courts, â€œBy filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time.â€
If your credit improves after filing for Chapter 13 bankruptcy and you have equity in your home, you can explore the possibility of getting a home equity loan; however, make sure that it won’t affect your ability to make your Chapter 13 debt payments on time every time. If it does, then it’s not worth pursuing the loan. You have to complete your Chapter 13 debt repayment plan successfully for your debt to get fully discharged.
The bottom line
Just because you file for bankruptcy, doesn’t mean you won’t be eligible to apply for a home equity loan or a HELOC in the future. In fact, once your credit improves, you can start seeing if you are eligible to take out loans again. The amount of time it will take before you are able to get approved for a home equity loan will depend on your own personal circumstances, how much your home is worth and how much equity you have in it.
However, be sure to carefully consider your decisions before taking on a home equity loan and make sure not to fall into the same financial trap that you did before applying for bankruptcy in the first place.