There was an 18% increase in bankruptcy filings in the past year. But bankruptcy doesn’t stop you from getting a refinance. However, refinance after bankruptcy can be difficult due to the long waiting time.
Between 2013 and 2023, the median loan amount for cash-out refinance was $198,000, and for non-cash-out refinance, it was $241,700. Moreover, between 2013 and 2019, the quarterly average originations of cash-out refinance were 240,000.
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📉 Refinance after bankruptcy
- A Chapter 7 bankruptcy discharges within 6 months, as it requires selling off your assets.
- Between 2013 and 2019, the median debt-to-income ratio needed for a cash-out refinance and non-cash-out refinance was 36 and 34, respectively.
- A Chapter 13 bankruptcy allows you to protect your assets by restructuring your debts. It spreads your payments across 3–5 years.
Can You Refinance Your Mortgage After Bankruptcy?
Yes, you can refinance a house after bankruptcy. However, you may have to wait a few years to rebuild your credit score before applying for a mortgage. Different types of bankruptcies affect your credit score differently.
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
Refinance procedures vary depending upon the type of bankruptcy. The most common types of bankruptcies are chapter 7 and chapter 13.
What Is a Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, or traditional bankruptcy, discharges you from your debt. Here, the lender liquidates your assets to recover the payable amount. However, assets like residential property, personal vehicles, and other personal belongings, are exempt.
What Is a Chapter 13 Bankruptcy?
On the other hand, a Chapter 13 bankruptcy restructures your debt and allows you to repay the creditors without liquidating your assets. It allows you to spread your debt payments over 3–5 years.
Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy: An Overview
Let us look at an overview and the waiting time for refinancing a mortgage after Chapter 13 and Chapter 7 discharge.
| Chapter 7 | Chapter 13 |
| You may be required to liquidate your assets to repay your debt. | Your debt is restructured and repaid. |
| Your debt is discharged within 6 months. | It can take 3-5 years to repay the debt. |
| It reflects on your credit report for 10 years. | It reflects on your credit report for 7 years. |
| How long after Chapter 7 can you refinance your home? 1. Conventional loans: 4 years 2. FHA loans: 2 years 3. VA loans: 2 years 4. Jumbo loans: 7 years | After how long can you refinance after Chapter 13 bankruptcy? 1. Conventional loans: Discharged for 2 years (filing should be 4 years old) and dismissed for 4 years. 2. FHA loans: No waiting time 3. VA loans: No waiting time 4. Jumbo loans: 7 years |
What Are the Benefits of Refinancing After Bankruptcy?
Refinancing a house after bankruptcy has several benefits, such as:
- Low monthly payments: Refinancing your loan for a shorter term with a lower interest rate can significantly reduce your monthly mortgage payments.
- Extra cash reserves: You can opt for a cash-out refinance after Chapter 7 and Chapter 13 bankruptcy. This will allow you to use your home’s equity to rebuild your credit score and pay off debt faster.
- Lower mortgage rates: You can refinance your mortgage at lower interest rates; this way, you’ll pay less interest by the end of your term.
How to Refinance After Bankruptcy?
There are a few steps through which you can refinance a home after bankruptcy, which are:
Step 1: Applying for a Refinance
If you opt for government loans like FHA, VA, USDA, etc., you might have a better chance of qualifying. In some cases, even if your credit score is around 500, you may get financing, depending on your loan-to-value ratio.
Once you finalize the lender, they may ask you for the following documents:
- The last two pay stubs
- Two recent W-2s
- Two recent bank statements
Step 2: Lock-in Your Interest Rate
It is advisable to lock in your interest rates, which fluctuate frequently. You must inquire if your lender offers a mortgage rate lock or not.
Step 3: Make Sure to Complete Underwriting
Once you submit all the documents, your lender underwrites your mortgage. Here, the lender verifies your income and whether you qualify for the loan or not.
Step 4: Home Appraisal
The lender will most likely order a home appraisal in order to find out the current worth of your house. This is also done to see if the house has lost value since you purchased it.
Step 5: Close on Your Loan
Once the above formalities are done, the lender will send you a closing disclosure. This document includes all the terms of your loan, including the total closing costs. After going through the document, you can pay the closing costs and close on your loan.
Bottom Line
Although you can refinance your mortgage after bankruptcy, you must wait a few years as per the type of bankruptcy that you file for.
Chapter 7 bankruptcy wipes your debt sooner by liquidating your assets due to which the wait time is longer. Conversely, Chapter 13 restructures your debt without liquidating your assets which reduces the waiting time.
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Frequently Asked Questions
Can I refinance my home during Chapter 13?
Yes, it is possible to refinance your home during Chapter 13 bankruptcy. However, you may face some difficulties due to strict eligibility requirements.
Can I get a HELOC after Chapter 7 discharge?
Yes, you can get a HELOC after a Chapter 7 discharge. However, you will have to wait for 2 to 7 years before you can apply for it.
What is the waiting period for FHA in a Chapter 7 bankruptcy?
You must wait for a minimum of 2 years before applying for an FHA loan in the case of Chapter 7 bankruptcy.
