Bankruptcy can feel like the end of the road. The stigma that people often attach to it is that it is a last resort – something to be avoided. Many people wonder how they could possibly recover from this kind of decision.
The truth is, there isn’t just life after bankruptcy – there are lots of options for how to live it. Whether you want to buy a home or refinance your current one, there are ways to move forward and live your best life after bankruptcy. All you have to do is a little research to understand them!
When you opt for a Chapter 7 bankruptcy – also referred to as a traditional bankruptcy 7 you choose a solution that essentially wipes the majority of debt from your record. This is an attractive solution for many people, especially those who are crippled by debt they are unlikely to ever be able to repay. However, it has lasting effects on credit and future financial decisions – much more so than a Chapter 13 bankruptcy would.
A Chapter 7 bankruptcy may be an indicator to creditors and lenders that you were unable to reach a workable agreement with your previous creditors that included repayment of your debts. This can lead future lenders to believe that you are likely to end up in this same scenario again – or that you can’t manage your finances at all.
This kind of profiling isn’t necessarily fair, but it is perfectly legal. Creditors use your previous experiences with credit and debt to compile a score that indicates your risk as a borrower. If you are considered a high-risk borrower, you are less likely to be able to get any kind of loan or line of credit. This includes a mortgage refinance after Chapter 7 bankruptcy. What’s more, you may also end up with unfavorable terms if you are able to secure a loan. It can be very discouraging for someone who is just trying to move forward with their life after some past financial mistakes!
All of this can make it seem like getting a mortgage refinance after Chapter 7 bankruptcy is impossible. However, there are ways to secure the refinancing you’re looking for, even with a bankruptcy in your past.
Remember, a Chapter 7 bankruptcy will remain on your credit report for ten years. This doesn’t mean you have to wait a full ten years before you consider a mortgage refinance after Chapter 7 – it just means you have to know the right way to approach the process before that decade has passed.
There is a minimum two-year waiting period after discharge from a Chapter 7 bankruptcy that must be observed before you can refinance your loan. It is important to know the date of your original bankruptcy discharge so that you can ensure that you aren’t attempting to refinance prematurely.
This minimum two-year waiting period is typically only observed by federally-backed loans, such as FHA loans, as well. For most standard loan providers, you will need to wait an additional two years – amounting to a four-year total wait. That may seem excessive, but it is certainly better than not being able to refinance at all! As before, keep up with dates to ensure that you are not attempting to refinance prematurely – and always check with your provider to find out the minimum wait period they observe.
You will also need to meet minimum credit requirements to refinance a loan. If you are short of these requirements – which can happen after a bankruptcy – use the time that you have to wait to refinance to rebuild your credit score.
During that wait period, you should also consider socking away some savings to cover closing costs. Any refinance will incur closing costs – typically 2%-3% of your total loan value. This isn’t something you are likely to have on hand right after a bankruptcy discharge, so be sure to save up while you’re waiting on your opportunity to refinance.
While you won’t have access to the best possible interest rates and other advantages of refinancing that people without a bankruptcy on their credit report might, there are ways to sweeten the deal. These tricks can help you increase the likelihood that you will receive your refinance and that your terms will be as good as possible – yielding you the best benefits.
It is important to prove to your lender that you have made improvements to your money management techniques in the time since your bankruptcy. Since you have to wait a minimum of two years before applying for a refinance, use that time to record your employment information, show that you have steady, gainful employment, and that you are paying your bills on time. This will go a long way in showing your lender that you are trustworthy and capable of handling the terms of your refinance.
Why go to all this trouble? There are plenty of benefits to refinancing. These include but aren’t limited to:
A cash-out refinance is another potential benefit. When you choose this type of refinance, you take on a higher overall debt, but receive the difference up front from your lender. This allows you to put that amount toward other debts – or right back into your mortgage or other primary loan – or use it to pay for other major expenses. Just be careful not to spend it frivolously. Otherwise, you might end up right back where you started in terms of debt!
If you still have questions about a mortgage refinance after Chapter 7 bankruptcy, talk to the experts at the VanHorn Law Group.
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