You want to refinance your mortgage but recently filed for Chapter 13 bankruptcy – is it possible? Some lenders may be willing to work with you, but you will have to do a little extra legwork to get approved.
Here’s what you need to know about refinancing after filing, including the types of loans that could be options and what lenders consider when assessing if you’re a good fit. You’ll also discover the benefits of refinancing in Chapter 13, along with the challenges you could face during the process and what to expect when you apply.
Can You Refinance Your Home During Chapter 13
Refinancing a home loan during Chapter 13 bankruptcy can be complex, but it is possible with court approval and if you’re able to meet other requirements.
Overview of Chapter 13 Bankruptcy
Chapter 13 bankruptcy, a type of reorganization bankruptcy, allows you to keep your assets while repaying debts over a three to five-year period. During this period, all financial decisions, including those related to your mortgage, must be approved by a bankruptcy trustee.
Understanding the Refinancing Process
To refinance your home during Chapter 13 bankruptcy, you must first obtain written permission from the bankruptcy trustee.
More specifically, the lender will want proof that refinancing will not negatively impact your repayment plan. They also want reassurance that refinancing will provide a tangible financial benefit, such as a lower interest rate or reduced monthly payment.
Mortgage Refinance Options While in Chapter 13 Bankruptcy
Not all home loan products are ideal if you’re in this situation. Below is an overview of those worth specific to have the best chance at getting approved for refinancing.
Federal Home Loan Mortgage Corporation (Freddie Mac)
Freddie Mac may allow you to refinance your mortgage while in Chapter 13 bankruptcy, given that you have maintained a satisfactory payment performance and the bankruptcy court provides written approval. Securing a refinance under Freddie Mac requires adherence to its specific criteria, which include timely bankruptcy plan payments.
Federal National Mortgage Association (Fannie Mae)
Fannie Mae might also offer refinancing options during Chapter 13 bankruptcy if you meet their underwriting requirements. You’ll need court approval, and evidence of on-time bankruptcy payment plans is usually required.
U.S Department of Veterans Affairs (VA Loans)
If you’re a veteran with a VA loan, you have the possibility of refinancing even while in Chapter 13 bankruptcy. The requirements include obtaining court permission and demonstrating a history of timely payments.
U.S Department of Agriculture (USDA Loans)
For homeowners with a USDA loan, refinancing during Chapter 13 may be an option with proper authorization from the bankruptcy court. Your payment history and current financial situation will be vital factors to determine eligibility.
What Factors Do Lenders Look At While Refinancing in Chapter 13
When you’re in Chapter 13 bankruptcy and seeking to refinance your mortgage, lenders will closely evaluate these key factors when reviewing your application:
- Credit score: Your credit score plays a vital role, as it’s an indicator of your creditworthiness. Some lenders may consider your post-bankruptcy payment history as opposed to your previous score.
- Payment history: Strong evidence of on-time bankruptcy plan payments is essential. This shows your commitment to resolving existing debts.
- Duration of bankruptcy: If you’ve been in a Chapter 13 bankruptcy for at least one to three years, lenders might be more open to approving you for a new home loan.
- Debt-to-Income Ratio (DTI): Lenders will evaluate your DTI to assess if you can handle your current debt, including the proposed new mortgage payment.
- Home equity: Your approval odds increase if you have an ample amount of home equity.
- Stable income: A stream of consistent and reliable income reassures lenders that you have the means to make your monthly mortgage payments.
Benefits of Refinancing in Chapter 13
Refinancing during this time could yield several financial benefits.
Lower Interest Rates
When you opt to refinance your mortgage during Chapter 13 bankruptcy, one key benefit is potentially securing lower interest rates. A reduced rate can significantly decrease your monthly mortgage payments, which, in turn, can free up income to cover big-ticket purchases or meet other financial goals.
Debt Consolidation
Refinancing your mortgage also affords you the opportunity to consolidate high-interest debt not included in the payment plan. This means you can integrate various debts into your mortgage, possibly at a lower interest rate compared to other forms of credit, allowing for streamlined repayments and potentially better terms.
Extended Repayment Periods
Another advantage of refinancing while in Chapter 13 is the possibility of extending the repayment period on your mortgage. By opting for an extended loan term, your monthly mortgage payments might be reduced, which frees up funds in your budget.
Challenges Faced While Refinancing in Chapter 13
Although there are advantages of refinancing in Chapter 13, you should also consider these drawbacks.
Hurdles in Qualifying
To refinance your mortgage under Chapter 13, lenders will thoroughly review your credit history and current credit score. Your credit score may have dipped significantly with the bankruptcy filing, which can make it challenging to qualify for a new mortgage.
Furthermore, mortgage companies may require that you have a consistent payment history on your Chapter 13 plan and that your bankruptcy has been active for at least a year. So, you may have to wait a bit if you recently filed for bankruptcy to have a chance at qualifying.
Risk of Higher Interest Rates
When you do qualify for a refinance, you may be subject to higher interest rates. These rates are often steeper due to the perceived increased risk of lending to someone who is still undergoing a type of bankruptcy. And unfortunately, a higher rate could mean exorbitant borrowing costs that negate the benefit of refinancing.
Potential Legal Obstacles
As previously mentioned, you must obtain permission from the bankruptcy court before you can move forward with refinancing.
The court’s approval is contingent upon whether the refinance will not adversely affect your Chapter 13 repayment plan. Submission of detailed documentation to the court and potentially the bankruptcy trustee can draw out the process. And there are no guarantees the court will approve your request.
The Process of Refinancing While in Chapter 13
Ready to move forward? Here’s a breakdown of what to expect.
Understanding the Eligibility
Again, you typically need a history of making on-time bankruptcy plan payments to be eligible for refinancing during a Chapter 13 bankruptcy. Lenders will review your credit profile to confirm you’ve adhered to the plan.
The Approval Process from Bankruptcy Courts
The next step is to obtain authorization from the bankruptcy court overseeing your Chapter 13 filing. The process involves presenting a comprehensive overview of how the refinance will benefit your financial situation without compromising the repayment terms agreed upon with your existing creditors.
The court will carefully evaluate if the proposed refinance serves your best interests before making a decision.
Preparing Necessary Documents
You’ll also need to gather and prepare several documents for both the court and your potential lender. This includes a detailed account of your current financial status, including income, debts, assets and your most recent credit report.
Lenders need this information to make a decision on your refinance application.
Choosing Your Mortgage Company and Application
Select a mortgage company that specializes in working with borrowers who’ve filed for bankruptcy. They should also be transparent about the specific loan products they provide and clearly communicate the associated fees and rates.
Once you’ve chosen a lender, submit your application with all required documents to receive a funding decision.
Conclusion: Refinancing While in Chapter 13
Refinancing your mortgage during a Chapter 13 bankruptcy may come with hurdles, but it’s impossible. By being patient, understanding the process and doing the legwork, you could get approved for a mortgage refinance that benefits your finances.
Be prepared to provide comprehensive documentation about your finances, which will reassure lenders of your reliability as a borrower. It’s equally important to have a clear understanding of the potential effects on both your bankruptcy plan and your long-term financial health before moving forward.
