Can You Get a Mortgage Refinance After Bankruptcy?
Yes, it’s possible to get a mortgage refinance after bankruptcy. The largest caveat is that there is a longer timeline involved, as you have to wait up to four years from the time that your bankruptcy debts are discharged. Still, going through bankruptcy doesn’t exclude you from the potential savings that may come with a refinance.
The type of bankruptcy matters: Chapter 7 vs. Chapter 13
There are six types of bankruptcy; the two most common types for individuals are Chapter 7 and Chapter 13. Here’s how they differ:
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Your assets | Your assets are sold by a trustee in a court-supervised process | Your assets can typically be retained if you repay debts within three to five years |
| When your debts are discharged | Your debts are discharged only a few months after bankruptcy is filed | Your debts are discharged only after you complete the payments required |
| How long it stays on your credit report | Shows on your credit report for up to 10 years | Shows on your credit report for up to seven years |
How long do you have to wait to refinance a house after bankruptcies?
How long you must wait depends on your bankruptcy filing type and your loan type. In some cases you could 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.
| Loan Type | Chapter 7 waiting period | Chapter 13 waiting period |
|---|---|---|
| Conventional | 4 years after discharge; 2 years if you prove extenuating circumstances | 2 years after discharge or 4 years after dismissal; 2 years in a dismissal case if you prove extenuating circumstances |
| Federal Housing Administration (FHA) | 2 years after discharge; 1 year if you prove extenuating circumstances | Can occur before discharge — must show one year of on-time payments |
| U.S. Department of Agriculture (USDA) | 3 years after discharge; 1 year if you prove extenuating circumstances | Can occur before discharge — must show one year of on-time payments |
| U.S. Department of Veteran Affairs (VA) | 2 years after discharge | Can occur before discharge — must show one year of on-time payments |
When to get a mortgage refinance after bankruptcy (and when to not)
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 to 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 amount of interest you 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 APR and/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 to get cash out
If you need a sum of money, borrowing against your house can be a cost-effective way to borrow. Loans with real estate as collateral tend to have the lowest interest rates.
When to not get a mortgage refinance after bankruptcy
If your credit is not recovered yet
There isn’t a magic spell 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 cannot take out a mortgage refinance. If your credit hasn’t recovered well, your interest rate might be too high to make refinancing a good idea.
If you’ll move before your break-even point
Mortgage closing costs are typically around 2% to 6% of the amount being borrowed. It can take a few years to save enough on your interest to the point that you break even with the cost of refinancing. If you move before you break even, you’ll lose money.
If the costs are too high
Closing costs, interest rate and total interest paid over the life of the loan may all add up to make refinancing after bankruptcy not worth it.
How to run the numbers
You’ll need some numbers from your current home loan, and you should have a realistic idea of what your refinance loan would look like, including the term, the interest rate and the fees.
Then use a mortgage refinance calculator. It could take a few years to recoup the costs of refinancing. Here’s an example of how to calculate the break-even point.
| Math 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 amount: $300,000 Original loan term: 30 years Original loan interest rate: 5% New loan term: 15 years New loan interest rate: 4.3% 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 $5,245 in interest. If you kept the home for the entire new loan term, you’d save $50,083. |
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 mortgage 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 some reviews on them and consider customer satisfaction scores.
Then apply to a few lenders. It does not hurt your credit to apply to multiple lenders any more than it does to one lender, as long as you do all applications within a time window of 14 days. The three major credit bureaus allow consumers to use this window for rate shopping.
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 they’ll negotiate. Tell a couple of the lenders that you’re looking at other offers and ask them if they can make their offer more competitive.
TIP: Lock in your mortgage 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. The Federal Reserve is expected to raise national rates several times in 2022, so a rate lock this year will be especially important and prevent your interest rate from going up.
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 done and the cost is charged to you as part of the closing costs.
5. Close on the mortgage refinance
Every mortgage, including mortgage refinancing, has a closing. In this process, everyone has 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-QM mortgage is a “non-qualified” loan, which has relaxed credit requirements and more lenient DTI ratios.
- Do a mortgage recast. A mortgage recast allows you to lower your payments and pay less in total interest by paying a large lump sum toward your mortgage principal.
- Ask for a mortgage modification. If you’re having financial hardship, ask your lender about their mortgage modification programs, which could lower your payments by extending your loan term, lower your interest rate or reduce your outstanding balance.
- Sell your home and buy or rent a new one. Selling your home could be an attractive alternative, especially if you could take advantage of the equity you’ve built.