Mortgage Lenders During Chapter 13

Regaining control of your finances during a chapter 13 bankruptcy can be difficult. Finding mortgage companies that will refinance your mortgage can be even more difficult if you already have a mortgage and want to refinance it.

While it is possible to refinance your home while filing for chapter 13 bankruptcy, there are additional lender refinancing requirements that must be met.

What is Chapter 13 Bankruptcy?

One of the most common types of personal bankruptcy in the United States is chapter 13 bankruptcy.

Chapter 13 bankruptcy involves repaying outstanding debt through a consolidated payment plan over a three to five-year period. After the repayment waiting period has expired, outstanding debt is discharged.

Mortgage Refinance Options During Chapter 13 Bankruptcy

Compared to chapter 7 bankruptcy, lenders view chapter 13 bankruptcy more favorably. This is due to the fact that Chapter 13 demonstrates your attempt to repay all or some of the debt, as opposed to eliminating the debt by selling off assets.

According to conforming rules, you must wait two years after a chapter 13 discharge and four years after a chapter 7 discharge before you can apply for financing.

However, regulations set forth by the Federal Housing Administration (FHA) and the Veterans Affairs (VA) are less strict. In fact, under certain conditions, both provide refinancing options to borrowers who are currently filing for chapter 13 bankruptcy.

Remember that VA loans are only available to qualified veterans and FHA loans are only available on primary real estate transactions.

Mortgage Refinance Criteria During Chapter 13 Bankruptcy

While undergoing chapter 13 bankruptcy, it is more difficult to qualify for FHA and VA guidelines than it is for a regular refinance. Lenders want proof that you have made amends for previous financial mistakes and are moving in the direction of sound financial standing.

The following conditions must be met in order to refinance:

  • At least 12 months’ worth of payments must have been made per the bankruptcy repayment plan
  • A minimum credit score of at least 580 (depending on the loan program)
  • You must verify the bankruptcy was a result of a significant, one-time economic event and that steps have been taken to avoid a similar event in the future
  • You must obtain permission from the Trustee or Bankruptcy Judge to proceed with the refinance
  • The good news is that lenders can directly collaborate with your lawyer to expedite refinancing court approval. The bankruptcy lawyer typically receives a copy of the preliminary refinance terms from the lender to review before submitting to the court.

    Court approval turnaround times can take weeks or even months, depending on volume. Lender will move forward with closing after the court approves the refinance.

    Benefits to Refinancing

    If you can meet the requirements listed above, refinancing may be a great option for you. A rate and term refinance will enable you to benefit from lower interest rates if refinance rates have decreased since the time of purchase. This will also result in a lower monthly payment.

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    You can refinance your loan balance up to 96 percent with an FHA loan. on a rate and term refinance, 5% of the property’s value.

    Additionally advantageous to borrowers in chapter 13 bankruptcy is a cash-out refinance. You can use the funds to settle all or a portion of their combined debts. Up to 80% of the property value can be refinanced with cash out thanks to the FHA.

    To be eligible for an FHA cash-out refinance, you must also have lived in the subject property as your primary residence for at least 12 months.

    Mortgage Refinance Considerations

    There are also some negative aspects of refinancing during bankruptcy to take into account.

    If you file for chapter 13 bankruptcy, it will negatively affect your credit report, preventing you from getting the best rates. Sometimes waiting until the bankruptcy has been discharged is the best course of action This gives credit time to recover for a lower rate.

    In addition, there are closing costs associated with a refinance.

    These include notary fees, appraisal fees, title and escrow fees, and others. It can be challenging for borrowers who are short on cash to come up with the closing money for a refinance.

    Rolling closing costs into the refinance loan amount can reduce or completely eliminate closing costs. Additionally, lenders may provide “no cost” refinances with a lender credit to pay one-time closing costs.

    Regardless of refinancing, you would still need to provide funds to cover expenses like prepaid interest and impounds.

    Additional details on these options are available here.

    The Mortgage Refinance Process

    A chapter 13 bankruptcy refinance adheres to the standard refinancing procedure, with the exception of the criteria mentioned above.

    Meet Requirements To Lock In Your Rate

    You must meet certain debt-to-income (DTI) and property equity requirements. To do so, you must first present proof of your income and credit, such as pay stubs, W2s, and bank statements.

    Prepare For A Home Appraisal

    To confirm the value of the property and the borrower equity, an appraisal will be required. Appraisals for FHA and VA are slightly more rigorous than conforming appraisals.

    Here are some details on FHA appraisals, as well as things to look out for before the inspection.

    The Bottom Line

    The refinance is prepared for closing once the appraisal is finished, underwriting approval has been obtained, and court approval has been secured.

    Refinancing during a chapter 13 bankruptcy requires more paperwork than a regular refinance, but if you can meet the additional mortgage lender requirements, it can be a great option.

    The first step in figuring out your options if you want to refinance your house after declaring chapter 13 bankruptcy is to get pre-approved.

    You can also call us at (855) 855-4491 and we can start working on your pre-approval right away.

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    How long do you have to wait to apply for a mortgage after Chapter 13?

    After filing for Chapter 13 bankruptcy, there is a two-year waiting period before you can obtain an FHA mortgage. It needs approval from the bankruptcy trustee, who is in charge of managing the creditor repayment plan, and documentation of timely payments made under the bankruptcy plan.

    Can I get a loan if I filed Chapter 13?

    It’s challenging to obtain new credit or a loan while filing for Chapter 13 bankruptcy. However, in certain circumstances, it might be possible. You’ll want to get prior approval from the court. Furthermore, you should probably be current with your plan payments and avoid asking for a loan to make up for a repayment plan delinquency.

    How does Chapter 13 affect getting a mortgage?

    If you use an FHA, VA, or USDA loan, there is no waiting period after being discharged from Chapter 13 bankruptcy and you can apply for a mortgage as soon as one year after filing. But while you’re in Chapter 13, conventional loans won’t be approved, and they demand a two-year waiting period after discharge.

    Can you get a FHA loan right after Chapter 13?

    You must demonstrate that you have followed the Chapter 13 plan for at least a year in order to qualify for an FHA loan. You’ll need a written court order in order to apply for a mortgage, and the lender will demand proof of the payment dates.