Can You Get a Mortgage Refinance After Bankruptcy?
Yes, it’s possible to get a mortgage refinance after bankruptcy. The main caveat is you’ll likely face a longer process, as you have to wait up to four years after your bankruptcy debts are discharged. Still, going through bankruptcy doesn’t exclude you from the potential savings that can come from replacing your current home loan.
The type of bankruptcy matters: Chapter 7 vs. Chapter 13
There are two main types of bankruptcy that can impact your ability to refinance: Chapter 7 and Chapter 13 bankruptcy. Here’s a breakdown of each:
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Your assets | A trustee sells your assets in a court-supervised process | You can typically retain your assets if you repay debts within three to five years |
| When your debts are discharged | Only a few months after you’ve filed for bankruptcy | Only after you complete the payments required |
| How long it stays on your credit report | Up to 10 years | Up to seven years |
How long do you have to wait to refinance after a bankruptcy?
How long you must wait depends on your bankruptcy filing type (Chapter 7 vs. Chapter 13) and your loan type, for example, a conventional loan or VA loan. These two factors determine your waiting period — the amount of time you must wait to refinance your mortgage after a bankruptcy filing.
In some cases, you can refinance earlier than the normal waiting period if you can prove that there were extenuating circumstances. Fannie Mae and Freddie Mac define “extenuating circumstances” as events beyond the borrower’s control, such as divorce, large medical bills and job loss.
Ready to compare refinance offers? Get Your Best Rates from Top Lenders TodayHere are the waiting periods for some of the most common types of mortgage loans:
| Loan type | Chapter 7 waiting period | Chapter 13 waiting period |
|---|---|---|
| Conventional | Four years after discharge; two years if you prove extenuating circumstances | Two years after discharge or four years after dismissal; two years in a dismissal case if you prove extenuating circumstances |
| Federal Housing Administration (FHA) | Two years after discharge; one year if you prove extenuating circumstances | Can occur before discharge — must show one year of on-time payments |
| U.S. Department of Veterans Affairs (VA) | Two years after discharge | One year after discharge |
| U.S. Department of Agriculture (USDA) | Three years after discharge | Can occur before discharge — must show one year of on-time payments |
When you should (and shouldn’t) get a mortgage refinance after bankruptcy
If you can secure a mortgage refinance, should you? The answer depends on what you’re looking for and how much it could cost you.
When you should get a mortgage refinance after bankruptcy
If you can reduce your interest. Because mortgages are typically for large sums of money and for long periods of time, even a small reduction in your interest rate can make a large difference in the total interest you’ll pay over the life of the loan. Refinancing to a shorter term, such as 15 years, can also help.
If you need lower payments. It might be worth refinancing after bankruptcy if you make your mortgage payments more manageable. To do this, you may be able to get a lower annual percentage rate (APR) or lengthen the loan term. Be aware, however, that lengthening the term could result in you paying much more in interest over the life of the loan.
If you need access to cash. Borrowing against your home equity can be a cost-effective way to get a lump sum. Loans that use real estate as collateral tend to have lower interest rates than other debts, including credit cards, which typically don’t have collateral attached to them.
Not sure which type of refinancing is right for you? Learn more about your home refinance options, including cash-out refinance loans.
Beware of mortgage scams
Unfortunately, some scammers prey on homeowners who are experiencing financial hardship. If you receive unsolicited offers from a company claiming that it can lower your mortgage payments or help you avoid foreclosure — in exchange for a fee — it’s likely a scam. If you’re having trouble paying your mortgage, it’s best to reach out to your lender directly or contact a HUD-approved housing counselor to review your options.
When you shouldn’t get a mortgage refinance after bankruptcy
If your credit hasn’t yet recovered. There isn’t a magic formula that can rebuild a person’s credit history overnight across all three credit bureaus. Rebuilding credit takes time. If you haven’t finished the waiting period, you likely can’t refinance your mortgage. If your credit hasn’t recovered, your interest rate might be too high to make refinancing worth it.
If you’ll move before your break-even point. Refinance closing costs are typically around 2% to 6% of your loan amount, and it can take a few years to break even on your refinance costs and truly enjoy your monthly payment savings. If you move before this point, you’ll lose money.
If the costs are too high. Your closing costs, interest rate and total interest paid over the life of the loan may all add up to make refinancing after bankruptcy too expensive.
How to run the numbers
You’ll need some numbers from your current home loan, which you can find on your most recent mortgage statement. You should also have a realistic idea of what your refinance loan would look like, including the term, interest rate and fees.
Then use a mortgage refinance calculator. It could take a few years to recoup your refinancing costs. Here’s an example of how to calculate the break-even point.
Example
You’ve owned your home for 10 years. You’re thinking about selling it and moving after five more years, and you want to know if it makes sense to refinance now.
Original loan term: 30 years
Original loan interest rate: 8%
New loan interest rate: 6.5%
New loan fees: 2%
Plugging those numbers into the calculator, you would break even after two years. If you sold the home five years after refinancing, you would have saved $14,000 in interest. If you kept the home for the entire new loan term, you’d save $110,391.
How to get a mortgage refinance after bankruptcy
1. Prepare your paperwork
Make sure that your ducks are in a row — meaning your waiting period is over — and that you can refinance your home after bankruptcy. If you’re good to go on that front, here’s a guide on mortgage refinance requirements.
2. Shop around and apply
Every lender has a slightly different way of looking at risk and processing applications. Shop around online to see what lenders are offering. Pay attention to the rates they offer and the fees they charge. Once you have some contenders, check out company reviews and consider customer satisfaction scores.
It’s a good idea to apply with a few different lenders to see which one offers you the best deal. One caveat: Submit all of your applications within a 14-day window to avoid excess hard inquiries on your credit report. The three major credit bureaus allow you to use this window for rate shopping.
Tip: Newer versions of the FICO score, the main type of credit score that lenders use, allow for a 45-day rate-shopping window. However, some lenders still use older versions of the FICO score, which has a 14-day window. It’s best to submit your applications as close together as possible to avoid negative effects to your credit score.
3. Negotiate
When you receive offers, compare them. You could go with the one that offers the lowest interest rate off the bat or you could see if the lender will negotiate. Tell a couple of the lenders that you’re looking at other offers and ask if there is anything they can do to make their offer more competitive.
Lock in your interest rate
A mortgage rate lock is a lender’s promise that the rate they quote you is good for a set period of time, which can range from 30 to 60 days or longer. Without this lock, the rate can change before closing on your home. However, rate locks come with potential downsides. You could be stuck with a higher rate if interest rates fall during the lock period, and it can be pricey to extend the rate lock if your closing is delayed.
4. Get a home appraisal
A home appraisal is an accredited professional’s evaluation of how much your home is worth. A mortgage lender typically orders the appraisal and passes on the fee to you as part of your closing costs.
5. Close on the mortgage refinance
During the closing process, the parties involved have the opportunity to double-check all the paperwork before contracts are signed and money exchanges hands. When you go to sign, bring identification and any necessary funds, typically in the form of a cashier’s check.
Alternatives to refinancing after bankruptcy
- Get a non-QM refinance. A “non-qualified mortgage” loan doesn’t follow the same set of consumer protection guidelines that standard mortgage programs do. Non-QM loans have relaxed credit requirements and more lenient DTI ratio maximums.
- Do a mortgage recast. A mortgage recast allows you to lower your monthly payment and pay less in total interest by applying a cash lump sum toward your mortgage principal.
- Consider a mortgage forbearance. Forbearance can help you temporarily pause or reduce your mortgage payments, allowing you to catch up on other debts and potentially avoid bankruptcy. It can also help you avoid foreclosure.
- Ask for a mortgage modification. If you’re experiencing financial hardship, ask your lender about its mortgage modification options, which could make your payments more affordable by extending your loan term, lowering your interest rate or reducing your outstanding balance.
- Sell your home and buy or rent a new one. Selling your home could be an attractive alternative, especially if you can take advantage of the equity you’ve built.