How to Refinance a Home When You Have Filed for Bankruptcy
Not only is refinancing your home after bankruptcy possible, it's highly recommended for many people. As a matter of fact, refinancing your home may be one of the only credit options available to you after bankruptcy. You still have a secured asset---your home---which can provide the means to improve your credit score. If you have a regular income and significant equity in your home, you probably filed Chapter 13 bankruptcy papers. Chapter 13 is a reorganization process, whereas Chapter 7 is a liquidation proceeding.
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Instructions
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Wait six months before applying for refinancing. The wait period after bankruptcy varies by lender. Some require up to two years of post-bankruptcy financial activity before they'll consider a refinancing package. Use this time, whether it's six months or two years, to reestablish your credit.
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Pay your current mortgage on time. This is critical during the period between your bankruptcy and your refinancing application. A Chapter 7 bankruptcy stays on your credit history for 10 years; Chapter 13 bankruptcies are active on credit reports for seven years. You can't do anything about those facts, but you can begin taking steps toward repairing your credit and better position yourself for refinancing approval.
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Review all your other bills, including utilities, food, auto loans, clothing, transportation and items such as cable television and magazine subscriptions. Eliminate unnecessary items. Canceling HBO and Sports Illustrated will help you to pay essential bills and show a potential lender your commitment.
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Open a bank account--with checking and saving components--if you don't have one. Establish a steady (however small) cash-flow stream into the accounts. Establish a direct-deposit account if it's available to you. Demonstrating your ability to save money even under dire circumstances will be beneficial when applying for refinancing.
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Apply for a credit card if you don't have one. If you don't qualify for an unsecured card, get a secured one.
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Pay all essential bills, such as utilities, on time. Pay the bills required by the terms of your bankruptcy agreement.
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Shop for a lender after six months of credit repair. You can do this in person, by phone or online. You'll almost undoubtedly require the services of a sub-prime lender. Compare both the interest rates offered and the upfront fees and closing costs. Don't forget to inquire with your current lender. Ask for terms in writing.
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Ask about prepayment terms. If the fees and penalty period are excessive, your ability to refinance with a traditional lender at a later date will be adversely affected.
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Question upfront fees beyond an application fee. While a loan origination fee, mortgage application fee and title-search fee are to be expected, beware fees that you don't understand or that seem unreasonable. Comparison shopping will allow you to eliminate lenders you feel are trying to take advantage of you.
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Apply for a loan. Once your application is approved, you'll be back to trying to improve your credit score.
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Tips & Warnings
With a Chapter 13 bankruptcy, meeting the terms of your three- to five-year payment plan will go a long way toward convincing potential lenders that you're serious about meeting your obligations and acting in good faith.
Medical bills account for more than half of all U.S. bankruptcies.
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