Home Refinancing After Bankruptcy

A home refinancing after bankruptcy can ease the monthly budget or prove to be another financial mistake. People go into bankruptcy for all kinds of reasons. Some get into financial difficulties after an extended job loss or because of a medical emergency. Others have gone through devastating loss due to natural disasters such as violent hurricanes and raging forest fires. Still others just don't seem to understand the basic principle that income has to exceed outgo. In keeping with the federal Bankruptcy Code, individuals usually file for Chapter 7 or Chapter 13 bankruptcies. In Chapter 7, the individual has few assets and all debt is typically written off. Though the individual gets some relief from creditors, the financial consequences continue for a long time. The Chapter 7 stays on the person's credit file for ten years. This can mean paying higher interest rates on car loans and home mortgages for a long time to come. Almost certainly, the interest rate on a mortgage for a home refinancing after bankruptcy will be higher than average.

The black mark might also affect job opportunities and automobile insurance rates as both employers and insurance companies may investigate an applicant's credit history. In Chapter 13, the individual sets up a court-approved payment plan for paying off all obligations within a three- to five-year schedule. Some obligations, such as credit card balances, may be reduced as part of the payment agreement. A Chapter 13 stays on a person's credit history for seven years. This individual may be the better candidate for a home refinancing after bankruptcy because potential creditors look more favorably on a Chapter 13 than a Chapter 7. The creditors recognize and appreciate that the person is making an effort to repay obligations rather than walking away from them. The writer of Proverbs wrote these encouraging words: "When wisdom entereth into thine heart, and knowledge is pleasant unto thy soul; Discretion shall preserve thee, understanding shall keep thee" (Proverbs 2:10-11). Everyone makes mistakes, but the wise person learns those hard lessons so that he doesn't repeat them. Help on money issues is available through financial counseling and other resources such as numerous books, through churches, nonprofit organizations, and government agencies.

The Chapter 13 individual might be able to arrange a buy-out or cash-out as part of the payment agreement. This refers to a specific type of home refinancing after bankruptcy that pulls out a portion of the property's equity. These funds may be used to pay off other creditors. However, the loan to value is typically limited to 85% of the property's appraised value. This means that the homeowner could refinance and obtain a new loan for $85,000 on a property appraised at $100,000. If the homeowner owes significantly less than $85,000 on the original mortgage, this might be a good option. However, if the homeowner's total mortgage amount (the first plus any second or home equity lines of credit) is close to or more than $85,000, than this option for home refinancing after bankruptcy obviously doesn't apply. The homeowner also needs to consider closing costs and the possible affect of private mortgage insurance (PMI). As long as the first mortgage remains less than $80,000, PMI is not required. But once the loan crosses that threshold, lenders require PMI which increases the monthly obligation. Borrowing 85% of a home's value means paying extra each month in PMI.

Recent changes in bankruptcy legislation require financial counseling both as a requirement for going into Chapter 7 or Chapter 13 and for coming out of these processes. The counseling is designed to help individuals make better financial decisions in the future and to improve their creditworthiness. Before applying for home refinancing after bankruptcy, it's a good idea to obtain copies of one's credit report from each of the three major reporting agencies. Federal law allows one free report from each agency on an annual basis so this is the time to set up a regular schedule for obtaining, reviewing, and monitoring these reports. Individuals want to be sure that there are no mistakes on the reports and, if there are, that these errors are corrected as quickly as possible. Someone who has gone through bankruptcy has two important tasks: to rebuild his credit history and to save money. Though the tasks might not be easy to accomplish, both are achievable by keeping careful track of expenses and paying bills in a timely manner.

A person should wait at least six months before applying for home refinancing after bankruptcy. However, experts suggest waiting at least two years if possible. This gives the individual time to rebuild credit and show a record of making payments as obligated. When the time comes to refinance, the homeowner may want to contact her current mortgage lender first. This institution may provide the best overall loan product, particularly if the homeowner hasn't missed making any payments. Even so, this is not the time to rush into any contract. Individuals need to comparison shop both interest rates, lender fees, and closing costs to find not only the best deal, but a mortgage that improves their current financial situation. As tempting as it may be, this is probably not the time to tap into the property's equity except under the most necessary circumstances. The goal of a home refinancing after bankruptcy should be to improve ones financial stability, not increase ones overall debt to an unmanageable level. By learning the hard lessons of budget management, going through the process of rebuilding creditworthiness, and patient comparison shopping, a motivated person can achieve financial stability after bankruptcy.

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