Home Refinance After Bankruptcy

People seeking a home refinance after bankruptcy may have a difficult time. Filing for bankruptcy damages credit scores and remains on an individuals credit report for up to ten years. Lenders are often reluctant to extend credit to individuals who have filed. Those that do tack on extra fees and charge higher interest rates to cover their risks. However, homeowners may feel pressure to refinance in order to avoid foreclosure or damaging credit even further. What do they do? There are options. Although laws do not prohibit individuals from applying for home refinance after bankruptcy, getting approved is almost impossible. But homeowners do have options.

Refinancing is simply a new mortgage that replaces an existing mortgage. Rates are packaged in two very different ways. Adjustable rate mortgages (ARMs) depend on the national index and fluctuate up and down frequently. Fixed rates are fixed at the current rate and do not fluctuate with the national index. Since mortgages are secured loans, using the house as collateral, interest rates tend to be lower than unsecured loans with no collateral. However, individuals wanting a home refinance after bankruptcy will face higher rates because of their increased risk factor. People who have filed under Chapter 13 bankruptcy have a better reputation and therefore more options than those who file under Chapter 7. This shows a willingness to work with creditors to repay debt, but getting approval takes time and patience to prove worth again to creditors. "But that on the good ground are they, which in an honest and good heart, having heard the word, keep it, and bring forth fruit with patience." (Luke 8:15)

Before rushing into a lender's office, homeowners need to determine why it's necessary to refinance and at what time to do so. Is the situation urgent? Or can refinancing wait until a more opportune time? Because interest rates fluctuate and are tied to an individual's credit situation, timing is crucial. There are many reasons to refinance at home. Some people wish to tap into their equity to free up cash to purchase a new car, pay for college or repay high interest debt. Others benefit by locking into a lower interest rate, shortening or lengthening repayment terms, or making monthly installments more manageable. Individuals applying for home refinance after bankruptcy usually want to save money, prevent foreclosure, and get back on track financially. The increased rates after bankruptcy proceedings make it difficult to do so. Refinancing is expensive with appraisal fees, closing costs, title insurance, and more. Often, it can cost more to refinance than not. But if timed right, refinancing can save homeowners thousands of dollars.

Unless an individual has already built up a considerable amount of equity in a home (at least 30% of the value), getting approved for home refinance after bankruptcy immediately is highly unlikely. Most people who file for bankruptcy don't have the equity in their home to repay outstanding debt, causing them to file. If individuals are committed to their repayment programs, continue to make mortgage payments in full and on time, and are able to save up for a decent down payment, credit scores begin to improve and interest rates drop after about two years. Any missed or late payment will deter lenders from approving another loan. As more time lapses, the better deal homeowners can get. Waiting to get that lower rate can shorten the repayment term, reduce monthly payments, and release extra cash flow every month. Until then, homeowners can expect minimum interest of 3% above the current rate.

Before applying for refinancing, homeowners must know where they stand. By visiting online websites, individuals applying for home refinance after bankruptcy can learn what type of rate is currently being offered to people like them - those with poor credit or whom had recently filed bankruptcy. That information is vital and can help them identity when an unethical lender is trying to charge too much. It can also determine if the overall cost is going to be worth the effort of refinancing. If a refinancing rate will drive monthly payments and overall payout up, sticking with the original mortgage may be the best choice. Homeowners should also check with their current lender first. If payments have been made on time, then he or she may be willing to offer a lower rate.

When the time comes to refinance, get quotes from at least three different lenders before applying. Compare interest rates and fees. Make sure there are no penalties for pre-payments or pay-off on the current mortgage. These can cost up to six months of payments or interest. Consider applying with lenders who specialize in refinancing to people who have bad credit. Some lenders prefer to wait until a borrower has completely repaid the bankruptcy before approving home refinance after bankruptcy. The Federal Housing Association (FHA) allows for refinancing after one year, and are very popular among homeowners. But beware loan scams which are on the rise. They often target people with bad credit who are especially vulnerable.

The best way to home refinance after bankruptcy is to start rebuilding credit immediately after the filing. Make all payments on time, especially mortgage payments. Apply for a credit card or use an existing one that is still open. If a lender will not approve credit for a standard card, apply for a secured credit card based on some type of collateral. Use the credit, but only sparingly. Pay off the balance at the end of each month to avoid interest charges and late fees. Doing will increase personal credit scores. Finally, establish savings and checking accounts. The more cash assets a person has, the greater their chance of a loan approval. Getting back on track financially after bankruptcy is not easy, but it is possible. Refinancing a home can help, but only if done in at the right time. Consider all the options and wait until that time comes if possible.