How long after bankruptcy can you refinance your home?

Refinancing can help you save money on your monthly mortgage payments.  It may also open the doors to a cash-out refinance, which will allow you to tap into your home equity to borrow money.

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If you’ve gone through bankruptcy, you might wonder whether you’ll be able to refinance. The good news is refinancing may be an option, even with a bankruptcy on your record. If you’re asking yourself how long after bankruptcy can you refinance your home, keep reading to find out.

Can you refinance after bankruptcy?

What happens after bankruptcy and how homeownership is impacted largely depends on the Chapter you file. While refinancing after bankruptcy can be difficult due to your damaged credit profile, it's feasible.

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Below, we'll dive into how Chapter 7, Chapter 13, and your mortgage type affect your ability to refinance. In most cases, you'll have to wait several years before beginning the refinancing process.

Refinancing: Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

Both Chapter 7 and Chapter 13 bankruptcy impose certain time frames or waiting periods during which you can’t take out a mortgage or refinance. Below, we’ll dive deeper into when you can refinance after a Chapter 7 and Chapter 13 bankruptcy.

Chapter 7

Also known as liquidation bankruptcy, Chapter 7 involves a bankruptcy trustee who liquidates or sells some of your property to repay your debts. A Chapter 7 bankruptcy will remain on your credit report for up to 10 years from the date you filed. As long as you’re current on your mortgage payments and don’t have much equity, you’ll likely be able to keep your home.

If you do get to keep your home, you won’t be able to refinance immediately. The type of mortgage you have will determine the waiting period to refinance after you’ve been discharged from a Chapter 7 bankruptcy. Here is a look at the waiting periods for each mortgage type:

• Conventional loan: 4 years
• FHA loan: 2 years
• VA loan: 2 years
• USDA loan: 3 years

The purpose of these waiting periods is to show the lender whether you can manage your remaining debts after you’ve undergone liquidation. It will give them a good idea of how risky it may be to approve your request for a refinance.

Chapter 13

Chapter 13 bankruptcy, which is often referred to as wage earner’s bankruptcy involves a repayment plan of three to five years. With this type of bankruptcy, you agree to repay your debts during the repayment plan. Once you complete the plan, any remaining debts you have will be discharged.

You’ll be able to keep your house, as long as you can make your mortgage payments throughout the repayment period. A Chapter 13 bankruptcy will remain on your credit report for seven years.

Fortunately, the waiting periods to refinance after Chapter 13 are shorter than they are for Chapter 7. These waiting periods are as follows:

• Conventional loan: 2 years
• FHA loan: No wait
• VA loan: No wait
• USDA loan:  No wait
  

Refinancing after bankruptcy

Just like any other financial strategy, refinancing your mortgage after bankruptcy comes with benefits and drawbacks to consider, including:

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Pros

• Lower monthly payments: If you refinance to a lower interest rate or longer loan term, you can enjoy lower monthly payments. Keep in mind that a longer term can cost you more in interest over the life of your mortgage.
• Lower interest rates: You can save thousands of dollars over the life of your loan if rates are lower than they were when you first took out your mortgage. However, it might be difficult to lock in a good interest rate until your bankruptcy leaves your credit profile.
• Cash to pay for debt and expenses: If you have sufficient equity in your home and qualify for a cash-out refinance, you may be able to replace your current mortgage with a new, larger mortgage and keep the difference in cash. You can use the cash to pay off debt or cover other expenses. Rest assured there are other ways to pull cash out of your home if a refinance is not the best fit for you.
• Convert to a fixed interest rate: A refinance can give you the chance to switch from an adjustable-rate mortgage to a fixed-rate mortgage. A fixed-rate mortgage can make it easier to stick to your budget and help you avoid unpredictable rate increases that can put you in a difficult financial situation.

Cons

• Must meet minimum credit score requirements: Most lenders require a minimum credit score before they extend a refinance offer. You'll need to rebuild your credit after bankruptcy, or they may be hesitant to lend to you.
• Will need to pay for closing costs: Unfortunately, you’ll be on the hook for closing costs if you do decide to refinance. Closing costs are usually 3% to 6% of the total loan amount and can be difficult to afford.
• Must provide bankruptcy records: If you pursue a refinance post-bankruptcy, you’ll need comprehensive, accurate records related to your bankruptcy. These may be your bankruptcy petition, bankruptcy discharge, and other court documents.

How to refinance your mortgage after bankruptcy

These steps can help you successfully refinance your mortgage after you’ve gone through bankruptcy.

1. Get your finances in order: First, make timely payments on your loans and credit cards, dispute any errors you find on your credit reports, and don’t apply for new credit accounts. By doing so, you can improve your credit and position yourself as a more attractive borrower. Also, make sure you have a variety of documents on hand as you’ll likely need them to apply. These include recent pay stubs, tax returns, and bankruptcy discharge papers. In addition, if your lender won’t let you roll closing costs into a loan, save up enough money to cover them.
2. Shop around and choose a lender: Next, do your research and compare refinance options from several lenders. Find a reputable lender that will offer you the best interest rate, most favorable terms, and lowest fees.
3. Apply: Once you hone in on the ideal lender, you can apply for the mortgage refinance online or in person. While this will likely involve a hard credit check that can temporarily lower your credit score, the new rate and/or repayment terms may be worth it.
4. Close: After the underwriting process, you’ll close on the loan. This is when you’ll sign some paperwork to finalize your new mortgage and pay your closing costs, usually in the form of a cashier’s check.

Alternatives to refinancing after bankruptcy

If you decide that it doesn’t make sense to refinance your mortgage after bankruptcy, here are some alternatives to look into:

• Non-QM refinance: This is a  “non-qualified” loan with relaxed credit requirements for borrowers who are self-employed, have a high net-worth or have gone through bankruptcy or foreclosure. The specific requirements for a non-QM refinance will depend on the lender you choose.
• Mortgage recast: With a mortgage recast, you can pay a large sum toward your conventional mortgage principal to lower your payments and reduce your interest charges. Typically, it doesn’t require a credit check and your term and interest rate will stay the same.
• Mortgage modification: A mortgage modification program from your lender can make your mortgage more affordable. It may lower your interest rate, extend your loan term, or reduce your outstanding balance. The requirements for a mortgage modification will depend on your lender and the type of loan you have.
• Home Equity Investment (HEI): Similar to a home equity loan, an HEI provides a lump sum of cash. The amount you may be eligible for will depend on the equity in your home. Credit score requirements are usually lenient, and you won’t have to make any monthly payments. Instead, you’ll repay the amount you receive as well as a percentage of your home’s future appreciation through a home sale or another funding source at any time during a 30-year term.  Keep in mind that there is a 7-year waiting period after your bankruptcy before you can qualify for an HEI.

Final thoughts

Refinancing after bankruptcy isn’t a walk in the park. However, if you’re patient and take the time to do your research and improve your credit score and finances, it’s certainly a possibility. Before you move forward with a refinance, be sure to explore alternative options, as they might make more sense for your particular situation and goals.