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How to Refinance a Mortgage after a Bankruptcy

There are many challenges for homeowners to re-establish credit after a bankruptcy, but home refinancing is one of the easiest ways to get begin the phase of rehabilitation. For homeowners, their property is one of their most important and valuable investments. Being able to use the liquidity in it for additional loans or taking the steps to refinance are two viable ways to reduce debt, improve your monthly payments, and generally improve your financial situation.

But for those who have gone through a bankruptcy, refinancing isn't always as easy to do. However, it's a myth that securing a home refinance after a bankruptcy is impossible to do. There are a few basic things worth understanding that can help you see that it's something you can do, as long as you meet a few basic qualifications where refinance standards are concerned.

Length Of Time

The first thing to pay attention to is the duration of time you must wait after discharge before you can refinance. This is an exciting time for many because these rules have been changed dramatically over the last year. In the past, borrowers would have to wait 3 to 4 years to refinance following a bankruptcy depending on their lender. But today, that has been changed.

  • Fannie Mae borrowers need only wait 2 years after a bankruptcy before they can refinance a bad credit mortgage.
  • FHA borrowers may still need to wait 2 years, unless they qualify for the FHA Back to Work program, which makes it possible to apply for a loan after just 12 months. 

This means that the duration you have to wait before refinancing is much shorter than before, which in turn means that you are better able to start moving your finances back towards the kind of situation they should be in.

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The Subprime Factor

Tne thing that is important to understand when trying to refinance a mortgage after filing Chapter 13 or Chapter 7 bankruptcy is that you'll likely be considered 'subprime', no matter the overall circumstances of your loan.
What this means is that you're not a 'prime' status borrower, which in turn translates to you being a larger risk to the lender who is extending you the bad credit home loan. That increased risk means that your loan isn't going to be as favorable to you as one would be for a prime borrower. You could end up with things like:

  • Higher interest rates
  • More closing costs
  • Higher loan insurance costs
  • Higher fees or penalties

These are put in place in a subprime mortgage to help lenders offset the additional risk of lending to someone with a bankruptcy in their past. But despite these elements, a refinance loan can often give you lower monthly payments and other benefits that make it worth paying attention to and considering for your home.

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Additional Factors To Consider

The first step is making sure that you meet the basic time limit guidelines associated with refinancing your mortgage following a bankruptcy claim. But there are a number of additional factors that go into not only determining if you are eligible for a loan, but also into the overall terms and conditions of the loan.
The exact requirements will depend upon what kind of loan you're going for. An FHA loan, for example, will have some different requirements than a loan through a more traditional lender. But at their heart, the basics still remain the same. Some of the biggest things that lenders may look for when you try to refinance after filing for bankruptcy include the following.

  • Credit Score – Credit scores are an indicator of your overall level of risk to a lender, and they have a very big influence on your ability to secure a loan as well as your ability to get better interest rates. Bare minimums for securing a refinance loan are around 580 for certain loans, and higher for others. Also remember that the higher your credit score, the better your interest rates are likely to be.
  • Liquidity – An initial mortgage often requires a down payment. But with a refinance loan, you need to be able to show liquidity. That is, your home needs to be worth more than what you owe on it. The difference between worth and debt will determine the type of loan, amount, and other factors related to the loan you're seeking.
  • Debt To Income – Debt to income ratios are having much more of an impact on loans, including refinance loans. The better your ratio, the easier it will be for you to secure a refinance loan of your choosing.

All in all, it's important to speak directly to a professional mortgage expert to determine what kind of options you have for refinancing your mortgage. Don't let a past bankruptcy make you feel as though you have no options here – it is very possible to refinance as long as you meet the basic requirements listed above, and taking the time to do so is something that any homeowner should consider doing for themselves if they feel refinancing can better their current financial situation. Article was written by James Swift.

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