{"id":39962,"date":"2024-06-25T14:26:22","date_gmt":"2024-06-25T10:26:22","guid":{"rendered":"https:\/\/www.miamiherald.com\/banks\/?p=39962"},"modified":"2024-09-27T18:30:29","modified_gmt":"2024-09-27T14:30:29","slug":"heloc-after-bankruptcy","status":"publish","type":"post","link":"https:\/\/www.miamiherald.com\/banks\/mortgage\/heloc-after-bankruptcy\/","title":{"rendered":"How to Get a Home Equity Loan After Bankruptcy"},"content":{"rendered":"

You have a sizable amount of equity in your home that you want to convert into cash. A home equity loan could be an option. But if you recently filed for bankruptcy, will you qualify for funding? It depends, but a recent bankruptcy filing doesn\u2019t necessarily mean you\u2019ll automatically receive a denial. Here\u2019s what you need to know to help boost your chances of getting approved.<\/p>

Understanding Home Equity Loans<\/h2>

As the name suggests, home equity loans let you tap into the equity you\u2019ve built up in your property or the amount of the home you own outright. There are two primary types to choose from: the standard home equity loan and the home equity line of credit (HELOC)<\/a>. This guide focuses on the latter. <\/p>

What is a HELOC and How Does It Work?<\/h3>

A HELOC is a line of credit that acts as a second mortgage. It works like a credit card, giving you access to a pool of cash you can borrow against as needed up to the credit limit during the draw period. The amount you can access is determined by the amount of equity you have in your home. <\/p>

The draw period typically spans five to 10 years, and you borrow, repay and borrow again until the draw period ends. Most lenders require interest-only payments on HELOCs during this window, and you\u2019ll only pay interest on the amount you borrow. Once the draw period ends, you enter the repayment phase, typically lasting up to 20 years. You\u2019ll need to repay both principal and interest, so expect your payments to be higher. <\/p>

In most instances, HELOCs are capped at 85% of your home equity minus your outstanding mortgage balance. So, if your home is worth $325,000 and you owe $200,000 on your home loan, you can potentially get a HELOC of up to $76,250 ($325,000 * .85 – $200,000). <\/p>

It\u2019s also worth noting that HELOCs generally come with variable interest rates. So, your monthly payments during the draw and repayment periods will fluctuate as rates change with market conditions. <\/p>

What is Bankruptcy?<\/h2>

Bankruptcy<\/a> is a legal process that helps individuals or businesses struggling with debt. It is designed to give you a fresh start or reorganize your debts by eliminating the debt balances or allowing you to resolve them through a repayment plan under the protection of the bankruptcy court. <\/p>

Chapter 7 Bankruptcy<\/h3>

Chapter 7 bankruptcy, or liquidation, gives you a fresh start. The court appoints a trustee to sell your non-exempt assets and use the proceeds to repay your creditors. It usually takes a few months to complete Chapter 7 bankruptcy, and you can begin rebuilding your financial health sooner rather than later. <\/p>

Chapter 13 Bankruptcy<\/h3>

Chapter 13 bankruptcy<\/a>, or reorganization, grants you a repayment plan to satisfy your creditors. You aren\u2019t required to give up your assets, but you must adhere to a repayment plan that spans three to five years. <\/p>

Can You Get a HELOC After Bankruptcy? <\/h2>

Getting approved for a HELOC after bankruptcy can be difficult, but it\u2019s not impossible. Most lenders have a waiting period before they\u2019ll consider you for funding – typically two years for Chapter 7 and one to two years following the completion of the repayment plan for Chapter 13. <\/p>

How Bankruptcy Affects HELOC Eligibility<\/h2>

When you file for bankruptcy, your credit score takes a tumble of a hundred points or more. The filing lingers on your report for 10 or seven years for Chapter 7 bankruptcy and Chapter 13 bankruptcy, respectively. Fortunately, the impact starts to diminish over time and could position you for approval after a few years have passed, and you\u2019ve started rebuilding your credit health. <\/p>

Are There Any Advantages of Getting a HELOC Post-Bankruptcy?<\/h2>

Securing a HELOC after bankruptcy<\/a> has its share of advantages. <\/p>

Access to Home Equity<\/h3>

The primary draw for most homeowners is the ability to access home equity. As previously mentioned, you can withdraw from your HELOC and use the funds however you see fit. Some homeowners cover costly home repairs, upgrades or other big-ticket expenses.<\/p>

Potential for Lower Monthly Payments<\/h3>

Although HELOCs come with variable interest rates, they often start off lower than what you\u2019ll get with traditional fixed-rate personal loans. So, you could save a bundle in interest and get more affordable monthly payments on your HELOC. <\/p>

Possibility of Debt Consolidation<\/h3>

If you\u2019re saddled with high-interest debt, a HELOC also provides a pathway to consolidate those pesky balances into a single loan – preferably with a lower interest rate. Doing so helps make the balances more manageable and could save you a ton of interest over time.<\/p>

Challenges and Considerations of Getting a HELOC After Bankruptcy<\/h2>

There are also potential downsides to keep in mind. <\/p>

Higher Interest Rates<\/h3>

Lenders may see you as a riskier borrower post-bankruptcy and give you a higher interest rate on a HELOC. So, it\u2019s worth shopping around to get the best deal. You should also work to improve your credit score over time to potentially secure lower rates. <\/p>

Limited Loan Amounts<\/h3>

Applying for a HELOC post-bankruptcy could also mean access to a lower credit limit. Even if you have a large amount of home equity, the lender may not approve you for the maximum HELOC, as they evaluate other components of your financial profile when deciding the amount and terms of your credit line. <\/p>

Stricter Lending Criteria<\/h3>

Again, expect more stringent lending guidelines when you apply for a HELOC post-bankruptcy. Lenders want reassurance that you\u2019ll repay what you borrow and will take the extra steps to ensure you\u2019re a good fit for funding. <\/p>

How to Get a Home Equity Loan After Bankruptcy<\/h2>

When you\u2019re ready to apply for a HELOC, here\u2019s how to move forward. <\/p>

Eligibility Criteria<\/h3>

Familiarize yourself with the general lending criteria. Each lender has specific guidelines, but most assess your employment history, income, credit score and debt-to-income (DTI) ratio. They also check to confirm you\u2019ve passed the waiting period. <\/p>

Ideally, you want a credit score of at least 620 and a DTI below 43% to be considered for a HELOC. Remember that a stronger credit score and lower DTI may help boost your approval odds. <\/p>

Documentation Required<\/h3>

Gather the following documents before applying to help expedite the lending process: <\/p>