If you have filed for bankruptcy, you might be amazed at how quickly you are able to buy a new home or refinance an existing mortgage thereafter. In other debthelp.com articles, we discuss the different types and benefits of bankruptcies. Just as it is important to select the best form of bankruptcy and a great bankruptcy attorney, it also is important to have a plan for after the bankruptcy is discharged (a final order comes from the court).
Believe it or not, there is no law against refinancing almost immediately after filing, or in many instances, right after discharge from a bankruptcy. In determining the best plan of action for managing finances, one must consider the power of the Trustee to protect creditors, and also acknowledge that bankruptcy never should be used to keep available resources hidden. Anyone who plans on filing for bankruptcy to protect a home and to refinance the current mortgage needs to work with the best legal advisor he or she can afford.
About one year after a bankruptcy filing, you should begin to see more attractive borrowing rates. By refinancing relatively quickly, there is a likely possibility that you will improve your credit score within two years, and consequently will reduce your interest rate further. Home equity should increase within the same timeframe.
How much will the bankruptcy cost you in terms of refinancing? A bankruptcy filer almost certainly will be classified as a sub-prime borrower for approximately two years after filing. Many lenders do not lend within that period, and those who do usually demand at least 3% above prime for the average low credit score and modest equity.
There are certain loan programs that have built-in time limits for refinancing or taking out a new mortgage. An FHA mortgage is one of the most popular federal loan programs, and it allows refinancing one year after filing Chapter 13 (not discharge) if trustee and mortgage payments have been made on schedule. Fannie Mae requires a two year wait.
Generally, limits on how soon a refinancing can occur favors Chapter 13. Since Chapter 7 seeks to wipe out debt while Chapter 13 is for repaying debts, it is sometimes even possible to refinance before a discharge in Chapter 13 is granted.
The ability to refinance immediately after filing usually depends on the credit score and the equity in a home (generally 30% or more).
Replacing an old mortgage with one that is new is in many ways a fresh start. If you are about to file bankruptcy, work with an attorney or financial counselor in order to plan for life after the bankruptcy.