If you’re one of the many individuals who have recently navigated the challenging process of bankruptcy, you might be wondering about the possibility of borrowing against your home equity. While bankruptcy can create significant financial roadblocks, securing a home equity loan after bankruptcy isn’t out of reach and can be a practical step toward regaining financial stability.
Declaring Chapter 13 bankruptcy can feel like a massive setback on the road to financial freedom. But it doesn’t have to spell disaster for your finances. With some strategic planning, you can rebuild your credit and tap into your home equity with a loan within a few years of completing your bankruptcy repayment plan.
Chapter 13 bankruptcy allows you to restructure your debts and pay them back over 3-5 years. As long as you successfully complete the repayment plan, you can recover more quickly from bankruptcy than with Chapter 7 liquidation. Within 1-2 years of discharge you may qualify for a home equity loan if you meet lender requirements.
Here’s what you need to know about getting a home equity loan after Chapter 13 bankruptcy
How Chapter 13 Bankruptcy Impacts Home Equity Loans
Chapter 13 bankruptcy remains on your credit report for up to 7 years. This can make lenders hesitant to approve you for new credit too soon after bankruptcy.
Specific impacts include:
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Lower credit scores: Your credit score will plummet after bankruptcy, sometimes by over 200 points. This makes lenders see you as a higher credit risk.
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Damaged credit history: Bankruptcy is a serious negative mark that shows lenders you struggled to manage debt. They’ll want to see you’ve rebuilt your finances first.
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Limited options: Not all lenders will work with recent Chapter 13 bankruptcy. Shopping around is key to finding a willing lender.
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Higher rates: Lower credit scores mean higher interest rates on loans. Expect to pay more than borrowers with excellent credit.
The good news? Rebuilding your credit after Chapter 13 is very possible if you know what to do. Follow the steps below, and you can be in a position to qualify for a home equity loan faster than you might think.
How Soon Can You Get a Home Equity Loan After Chapter 13?
Most lenders require a waiting period before approving a home equity loan after Chapter 13 bankruptcy. Their risk tolerance varies, but here are some general guidelines:
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1 year for FHA cash-out refinance: If you have extenuating circumstances, you may qualify for an FHA refinance loan.
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2 years for home equity loan/HELOC: Wait at least 2 years after discharge before applying for a home equity loan or HELOC.
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3-5 years for conventional loan: You’ll need a seasoning period of 3-5 years for a conventional cash-out refinance after Chapter 13.
Note that these timelines assume you’ve rebuilt your credit responsibly. The stronger your credit score, the better your chances with any lender.
4 Tips for Qualifying for a Home Equity Loan After Chapter 13
Follow these four tips to improve your chances of getting approved for a home equity loan within a few years of completing Chapter 13 bankruptcy:
1. Work to Improve Your Credit Score
The higher your credit score, the better. Shoot for at least 620-680 to qualify, but scores of 720+ get optimal rates. Here are some tips for credit repair after bankruptcy:
- Always pay bills on time
- Lower credit utilization below 30%
- Don’t close old credit accounts
- Open new credit if needed
- Dispute any errors on your credit reports
2. Research Lenders Willing to Work with Chapter 13 Borrowers
Shop around with lenders familiar with bankruptcy debtors. Online lenders are often more flexible than banks. Ask about their Chapter 13 lending policies.
3. Choose the Right Loan Product
Consider a cash-out refinance, home equity loan, or HELOC. Make sure to pick an affordable product that aligns with your financial goals.
4. Be Transparent About Your Situation
Explain the circumstances that led to your bankruptcy. Lenders may offer more flexibility if the cause was outside your control.
Pros and Cons of Home Equity Loans After Bankruptcy
Home equity loans allow bankruptcy filers to tap into their home value for financial flexibility. But there are some tradeoffs to consider:
Pros
- Lower rates than personal loans or credit cards
- Access larger loan amounts
- Can use funds for any purpose
- Potentially tax-deductible interest
Cons
- Risk of losing home if you default
- Closing costs and fees
- Lost equity and interest paid
- Higher rates than borrowers with good credit
Make sure you can comfortably handle the payment obligations before taking out a home equity loan after bankruptcy. While home equity can provide financial breathing room post-bankruptcy, also beware of the risk of overleveraging yourself again.
Partner With the Right Lender for Your Post-Bankruptcy Home Equity Loan
The lender you choose can make or break your chances of getting approved for a home equity loan after Chapter 13. Look for an experienced lender that won’t judge you by your bankruptcy history alone.
Online lenders tend to offer more flexible lending guidelines for borrowers with bankruptcies and lower credit scores. With the right lender on your side, you can tap into your home equity smarter and rebuild your finances after Chapter 13.
How Much Time Will You Need to Wait?
While the timing varies, here are approximate seasoning periods required by lenders:
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1-2 years: FHA cash-out refinance loans if you have extenuating circumstances for Chapter 7 or make 12 on-time payments in Chapter 13
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2 years: Minimum for a home equity loan or line of credit after Chapter 13 discharge
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3-5 years: Wait time for a conventional cash-out mortgage refinance after completing Chapter 13
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5-6 years: You’ll have the most options available if you wait this long after discharge
The most important factor is showing lenders you’ve rebuilt your credit responsibly since bankruptcy. With diligence, you can access your home equity sooner than you may think.
Given the Risks, Is a Home Equity Loan Wise After Bankruptcy?
While home equity loans allow financial flexibility, they also come with risks to weigh:
Potential benefits:
- Access cash without selling home
- Lower rates than alternatives
- Fund home improvements
- Pay off high-interest debts
Risks to consider:
- Overleveraging with more debt
- Higher chance of re-default
- Further damage to credit if you miss payments
- Losing home to foreclosure
A home equity loan can be a useful financial tool after bankruptcy if used prudently. But make sure you go in with eyes wide open to the risks. Avoid borrowing more than you can reasonably manage.
Explore Alternatives Like Personal Loans if Home Equity Isn’t an Option
If you need access to cash but don’t have sufficient home equity or want to avoid the risks of borrowing against your property, alternatives like personal loans can also help rebuild credit after bankruptcy.
Online lenders now offer personal loans tailored specifically to bankruptcy borrowers’ situations. While rates are higher than mortgages, these unsecured loans are less risky than borrowing against your home.
Talk to a Bankruptcy Attorney Before Taking Out a Home Equity Loan
Before pursuing a home equity loan post-discharge, it’s wise to consult your bankruptcy attorney. They can review your situation and offer guidance on timing and risks. An attorney can also explain what protections or exemptions may still apply to your home equity.
Pay Off High-Interest Debt If You Tap Home Equity After Bankruptcy
One smart use of home equity is consolidating and paying off lingering high-interest debts that survived bankruptcy. This can provide relief from burdensome interest payments.
But have a plan for managing new debt wisely going forward. Don’t end up back in the same situation if you tap equity after bankruptcy.
How to Start Rebuilding Credit and Qualifying for a Home Equity Loan
Here are some tips to start rebuilding your credit right away after Chapter 13 discharge:
- Get copies of your credit reports to review for errors
- Begin paying all bills on time and in full
- Keep credit accounts open instead of closing them
- Open a new secured credit card if you have no open accounts
- Limit credit use to 30% or less of limits
- Hold off applying for new credit too soon
Give yourself time to re-establish positive payment history and your scores will steadily improve. Most lenders will want to see at least 2 years of responsible credit management after bankruptcy before approving your home equity loan.
Explore Federal Mortgage Programs Like FHA Loans
FHA loans can be an option for borrowers who recently filed Chapter 13 bankruptcy, provided you meet credit score and other eligibility requirements.
FHA lenders take extenuating circumstances into account. This allows more flexibility than conventional loans. Talk to an FHA specialist lender about your options.
What Hurdles Do You Face When Applying for a Home Equity Loan After Chapter 13 Bankruptcy?
Here are some of the biggest obstacles to getting approved for a home equity loan after completing Chapter 13 bankruptcy:
- Meeting minimum credit score requirements (often 640-680)
- Having sufficient income to qualify based on debt
What About After Chapter 13 Bankruptcy?
Post-Chapter 13, the scenario looks slightly different. Since this bankruptcy type involves a repayment plan, your commitment to this plan and its successful conclusion can positively influence lenders. You will have to re-establish credit and wait only one year if you want a cash-out first mortgage with an FHA loan. But you will have to wait at least two years if you want a home equity line of credit or a HELOC.
JVM Lending will give you customized expert-recommended refinance options.
What Does Bankruptcy Mean for Your Financial Options?
As mentioned above, bankruptcy remains on your credit report for 7 to 10 years, depending on the type of bankruptcy and your situation. Bankruptcies should be considered a fresh start though and not the end of your financial journey. You can definitely still obtain mortgage loans after your bankruptcy. You will, however, just need to wait for the required seasoning period and re-establish your credit.
How a Chapter 13 Bankruptcy Can Wipe Out A Home Equity Line of Credit
FAQ
How long after Chapter 13 can you get a home equity loan?
How long after Chapter 13 can I get a loan?
What disqualifies you from getting a home equity loan?
How soon after Chapter 13 can I refinance?
Can I get a home equity loan after bankruptcy?
However, if you retain homeownership and have sufficient equity in your home, you might still be eligible for a home equity loan. Lenders will likely require a “seasoning” period after your bankruptcy though; they will want to see that you’ve rebuilt your credit and re-established yourself financially.
What is home equity in Chapter 13 bankruptcy?
It’s likely that your equity falls between the two extremes. Your home’s equity is the difference between the value of your home, and anything you’d have to pay if you sold your property, such as your mortgage, and any other liens. Is Your Home Equity Exempt in Chapter 13 Bankruptcy?
Can I get a home equity line of credit during Chapter 7 bankruptcy?
Entering Chapter 7 bankruptcy will prevent you from getting a Home Equity Line of Credit prior to the bankruptcy being discharged. Conventional loan regulations would not allow it, and even private lenders would avoid lending on your home while you are in bankruptcy. Let’s look at why.
Can I get a HELOC after Chapter 13 bankruptcy?
Yes, if you have kept your credit clean, and if you have enough equity in your home, you will be able to get a HELOC after Chapter 13 bankruptcy. The conventional lenders who provide HELOC loans are not all the same. Some of the terms may be different from one lender to the next.