Mortgage Refinance After Bankruptcy: Options, Requirements and Next Steps
You can refinance your mortgage after bankruptcy, but will likely face a longer process. Once your filing is complete and you’ve satisfied a mandatory waiting period, you can get a mortgage refinance.
If you’ve gone through a Chapter 7 or Chapter 13 bankruptcy, there’s typically a waiting period that you must complete before you can apply for another loan, including a mortgage refinance. While there’s typically a limit on how soon you can refinance a mortgage loan even for people who haven’t filed for bankruptcy, doing so may extend your wait to up to four years.
However, the good news is that it’s possible to refinance your mortgage after bankruptcy so you can benefit from potential savings. Here’s everything you need to know.
- The waiting period to refinance your home after bankruptcy varies by the type of bankruptcy and kind of mortgage loan. You likely won’t qualify for a refinance until after this set time has passed.
- Deciding whether to refinance after a bankruptcy means considering a number of variables like the waiting period, your credit score, whether you plan to move soon, and the financial pros and cons of a new home loan.
- If the time isn’t right to refinance after a bankruptcy, there are alternatives. You could seek out a cosigner, ask your lender for a forbearance or get a mortgage modification.
How long after bankruptcy can you refinance?
| Mortgage type | Chapter 7 waiting period | Chapter 13 waiting period |
|---|---|---|
| Conventional loan | Four years (two with extenuating circumstances) | Two years from discharge date or four years from dismissal date (two with extenuating circumstances) |
| FHA loan | Two years (or one with extenuating circumstances) | One year |
| VA loan | Two years | One year |
| USDA loan | Three years | One year |
Time is one of the biggest factors in qualifying for a home loan refinance after a bankruptcy. In fact, it’s likely you’ll be denied a refinance if you apply before the end of the waiting period that varies from one to four years. The amount of time you must wait to refinance is typically longest for a conventional mortgage loan with Chapter 7 bankruptcy.
If you have a government-backed loan such as an FHA loan, a VA loan or a USDA loan, the waiting period is typically shorter. For example, the waiting period for an FHA loan after bankruptcy is one to two years depending on the type of bankruptcy you filed. Keep in mind that there’s also typically a waiting period to get a home equity loan after bankruptcy.
However, there is another option: You may be able to get a mortgage refinance immediately after bankruptcy if you apply for a nonqualified (non-QM) mortgage. Keep in mind that while non-QM mortgages don’t typically have a waiting period after bankruptcy, they also may:
- Come with higher interest rates and fees
- Require higher down payments
- Offer longer terms, such as a 40-year mortgage, that make the loan more expensive
- Have “risky” loan features such as an interest-only period or balloon payment
It’s important to carefully consider whether a non-QM mortgage refinance will (or won’t) be financially beneficial to you before you apply. Unless you absolutely need to refinance immediately, you might be better off completing the waiting period and getting a qualified mortgage.
Understanding Chapter 7 vs. Chapter 13 bankruptcy
There are major differences between the types of bankruptcy, including whether you get to keep your assets, how debts get discharged and even how often you can file bankruptcy.
| Chapter 7 | Chapter 13 | |
|---|---|---|
| How it works | Your non-exempt property gets sold to pay your creditors. Debts may be discharged to give you a “fresh start.” | You keep your property and pay off a reduced debt over a set period of time on a manageable payment schedule. |
| Who is eligible | Debtors who have received credit counseling from an approved agency and meet certain other criteria. | Debtors with a steady income whose debt falls within set financial limits of $526,700 for unsecured debt and $1,580,125 for secured debt. |
| What happens to your assets | Any assets that aren’t exempt may get sold. You may be able to “reaffirm” a debt to keep an asset such as a car. | You typically get to keep all of your assets as long as you continue making payments as agreed in your plan. |
| Bankruptcy discharge | Typically 60 to 90 days after the first meeting of the creditors, but the timeline may vary based on creditor court filings or actions. | After you complete the payment plan, which typically takes three to five years. You also may need to meet other requirements. |
| Which debts can’t be discharged | A variety of debts, including alimony, child support and some taxes and government education loans. | A variety of debts, including a mortgage, alimony, child support, some taxes and government education loans. |
| Costs and monthly payments | You typically do not have any monthly payments. | You likely will have monthly payments to creditors based on the plan set up through the court. |
| Timeline for the process | Typically less than four months | Typically three to five years |
| How long it stays on your credit report | 10 years | Seven years |
How to get a mortgage refinance after bankruptcy
Want to refinance your home loan after bankruptcy but not sure where to start? Here’s a step-by-step guide on how to refinance after a Chapter 7 or Chapter 13 bankruptcy.
- Make sure the time is right to refinance. Verify that your waiting period is over — and check your credit report to see if your score has rebounded enough to make refinancing worthwhile. You may be able to refinance with bad credit, but it may not be worth it based on the terms. Also make sure you can meet mortgage lender requirements such as the minimum credit score for refinancing.
- Compare rates and fees. Start by shopping for mortgage lenders online, looking at rates, fees and requirements. Borrowers can potentially save tens of thousands of dollars over the life of a loan when they compare rates, a LendingTree survey found. And you don’t need to seek out special bankruptcy refinance mortgage lenders so long as you’ve satisfied the necessary waiting period and other requirements.
- Compile your bankruptcy paperwork. Your lender may ask for documentation of your bankruptcy so it can verify that the process was completed as agreed and the waiting period has passed. It’s easier if you’ve gathered this information before you apply.
- Submit mortgage applications. Once you’ve selected a few lenders, gather your documentation and fill out your refinance applications. Make sure to submit all applications within 14 days to be on the safe side. Most credit score models will treat multiple applications within a set time period as one hard inquiry to allow consumers to shop loans without multiple dings on their credit report.
- Look at the loan estimates. Compare offers by looking at each lender’s loan estimate. Look at the interest rate, processing fees, loan origination fees and closing costs. Keep in mind that the annual percentage rate (APR) reflects the total cost of the loan.
- Negotiate for a better deal. Many borrowers don’t know you can negotiate mortgage rates. Contact your top choice lenders, let them know you’ve received other competitive offers, and ask if they can sweeten the deal by lowering the interest rate or waiving fees.
- Complete the refinance loan process. Check to see if your offer comes with a mortgage rate lock, meaning you can get the quoted rate for a set period of time up to 60 days or longer. There are pros and cons to a rate lock. During the process, you’ll also likely need a home appraisal so the bank can determine how much your home is worth. The appraisal fee is typically included in your closing costs.
- Close on your refinance loan. At closing, double-check all the paperwork and sign your loan contract. You’ll need to bring your ID to closing along with any required paperwork and necessary funds, typically in the form of a cashier’s check or wire transfer.
Should you get a refinance after bankruptcy?
While it’s possible to get a mortgage refinance after bankruptcy, a question remains about whether you should. The answer depends on what you’re looking for and how much refinancing could cost you.
When you should refinance
- If you can reduce your interest rate. Mortgages typically involve borrowing a large amount for an extended time. The savings from even a slightly lower interest rate can really add up over the life of the loan. Refinancing to a shorter term, such as 15 years, may also help.
- If you need lower payments. It might be worth refinancing after bankruptcy to make your mortgage payments more manageable, either with a lower APR or a longer loan term. But keep in mind that lengthening the term could cost you much more in interest over the life of the loan.
- If you need access to cash. Tapping into your home equity can be a cost-effective way to get a lump sum of cash. Loans that use real estate as collateral tend to come with lower interest rates than those that typically don’t, such as credit cards.
When you shouldn’t refinance
- If your credit hasn’t yet recovered. It takes time to rebuild your credit after bankruptcy. While it is possible to get a home loan with bad credit, or even after foreclosure, your interest rate might be too high to make refinancing worthwhile.
- If you’ll move too soon. Refinance closing costs are typically around 2% to 5% of your loan amount, and it can take a few years to break even on your refinance costs. 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.
Timing when it makes sense to refinance after bankruptcy depends on your financial situation and a variety of factors. If you can qualify for a lower interest rate, reduce your payments or get access to needed cash, it may be a good idea to apply for a mortgage refinance. On the other hand, it might not make sense to do so if you still need to rebuild your credit, the costs are too high or if you plan to move soon.
Alternatives to a refinance after bankruptcy
- Get a mortgage cosigner. If you can’t qualify for a mortgage refinance on your own, getting a relative or close friend with good credit to sign onto the loan as a mortgage cosigner may increase your options while you rebuild your credit. Keep in mind that even with a cosigner, you’ll still need to meet the necessary waiting period and other requirements.
- Look at government-backed refinance options. If you have an FHA, VA or USDA loan, you may be eligible for a government refinance program. These programs, such as the FHA Streamline Refinance, USDA Streamlined Assist Refinance and the VA Interest Rate Reduction Refinance Loan (IRRRL), may make it easier to refinance even with less-than-perfect credit or an underwater mortgage.
- Get a non-qualified mortgage loan. A non-QM refinance doesn’t have to follow some of the strict guidelines required with other mortgages. For example, lenders might allow less documentation, a higher debt-to-income ratio (DTI) or may even refinance a defaulted mortgage. While it can be easier to qualify for a non-QM loan, there are additional risks to consider.
- Ask your lender for a forbearance. A mortgage forbearance is a tool lenders offer to help borrowers who are experiencing financial hardship. If you’re having trouble making your payments, your lender may temporarily pause or reduce your mortgage payments, offering you some breathing room. A forbearance could also help you to avoid mortgage default and foreclosure.
- Consider a mortgage loan modification. If you’re having trouble making mortgage payments, your lender might be willing to modify your loan. A mortgage modification can lower your payments by extending your loan term, lowering your interest rate or reducing your outstanding balance.
- Sell your home and start fresh. If you’re not happy with the terms of your mortgage and you can’t refinance, selling your home might make sense. But it’s important to consult with your bankruptcy attorney on the timing, rules and potential consequences of selling. In some cases, you might need permission from the bankruptcy court. And in other situations, home sale proceeds over a certain amount must be used to pay creditors.
It’s wise to weigh each alternative against your own situation, including the amount of time that’s passed since your bankruptcy, to decide which one is right for you.
See today’s refinance rates and top lenders on LendingTree.