How to Refinance a Home After Bankruptcy

In some cases, Bankruptcy is the only option for families that are unable to repay their debt. In the United States, there are several types of bankruptcy, but most consumers will either declare Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.

In Chapter 7 Bankruptcy, which is the most common, the debtor is allowed to keep essential property, but all other assets are liquidated. Chapter 13 Bankruptcy is a little bit more complicated, involving a reorganization of a persons debt, but as with Chapter 7 Bankruptcy, the debtor will be able to retain some of their property.

After bankruptcy, many homeowners are left with a mortgage with very high interest rates and high monthly payments. So, to help reduce monthly payments and receive a lower interest rate, many homeowners choose to refinance their home.

Even though declaring bankruptcy means that for the next 7 to 10 years your credit score will be very low, there are some lenders who will be willing to work with you to refinance your home. In part, this is because you already have an existing mortgage, so refinancing the mortgage is not typically considered that big of a risk.

Things You'll Need

• Knowledge about your personal finances
• Time
• Access to the Internet(not necessary but really helps)

Instructions

1. First, determine whether your current mortgage has a penalty for prepayment.

   Some subprime mortgages will charge a fee if you pay off the mortgage early. If this is the case, find out how much the fee is. If your mortgage has an early pay-off fee, it may still be in your best interest to refinance the mortgage, but you will need to take this expense into account.

2. Begin setting aside some money. You will have to pay a loan origination fee, mortgage application fee, and attorney fees, as well as a new title search and possible mortgage insurance. These costs, which are typically called junk fees, can quickly add up, so it is important to have some money set aside.

3. Next, consider your living expenses to determine how much money you can afford to pay every month towards your mortgage.

   It is important to take into account any outstanding debt, car payments, food, electricity, and water, as well as any other utilities or bills that must be paid every month. Compare the total of these figures with your monthly income to determine what type of mortgage payment you can afford every month.

4. Start doing some calling around to local mortgage lenders to inquire about their current interest rates.

   This will help you get an idea of standard rates, so try to call up or check as many different lenders as possible. DO NOT get into specifics or give them any details about your situation just yet. Instead, call up and ask what their current interest rate is. You can also check several online lenders, who will usually have their interest rates prominently displayed on their webpage.

   Since you have declared bankruptcy and have less than perfect credit, you may not get offered the same interest rates, but for comparison, it is essential to know what types of mortgage interest rates are available on the market.

5. Once you have an idea of standard mortgage rates, begin to collect estimates from several lenders for the cost of refinancing your mortgage.

   Do not actually apply for the mortgage, but instead ask the lender to prequalify you, which does not cost anything. Make sure you inquire about any costs, such as application fees, that will be associated with refinancing.

   The lender will then ask you several questions about your situation and provide you with a quote for their services. If you are on good standings with your current lender, make sure you ask them for an estimate as well.

   Remember to be honest about your bankruptcy, your earnings, and your current debt. They will not actually check these numbers during pre-qualification, but when it comes time to apply for the mortgages, they will run your credit. Padding your numbers will only waste your time and that of your lender, while also potentially ruining your chance of a loan with that particular lender.

6. When you have several estimates, compare these with standard mortgage rates to determine if the interest rate is acceptable. It is also important to consider any penalties for late payments, prepayment penalties, or rate changes that might occur over the course of the mortgage.

   If you find that the interest rates are extremely out of line with traditional interest rates, get some more estimates from other lenders.

7. Once you find a mortgage that has an affordable monthly payment and interest rate, it is essential that you compare it with your current mortgage. Sometimes, refinancing your home might not actually be in your best interests, because in the first three years of a mortgage you are only paying interest. When you refinance a home, you are starting all over again and throwing away all the interest you have already paid.

   Break down your monthly payments into an amortization table for both your current loan and your new loan. Determine how long it will take you to begin saving money on your new loan after you have paid for refinancing your mortgage, so you can evaluate whether refinancing your home is worth it.

   Make certain to consider both the cost of the loan, as well as the cost of the junk fees.

8. After careful consideration if you find a lender that has acceptable terms, make sure you try to negotiate some of the loan fees. Junk fees can often be reduced, so it is important to ask about a discount on these fees.

Tips & Warnings

• Always provide honest answers to your lender about your bankruptcy and any debt. They will find this information out anyway when your credit is run, so lying serves no purpose.

• When considering a loan, make sure to take into account junk fees and any rate increases that might occur.

• There are a number of websites that offer a free interest rate calculator with amortization table that allows you to plug in your interest rate, principal, and payment schedule. These can be a great resource when comparing mortgages.

• Sometimes, even if the new loan has a significantly lower interest rate, it may not be in your best interest to refinance the mortgage, so make sure you carefully consider the cost of refinancing a home.