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How to Refinance After Bankruptcy

How to Refinance After Bankruptcy

Your options when trying to refinance after bankruptcy are most often limited by the experience of your loan officer.

There is a lot of confusion and misinformation around refinancing a mortgage that was included in a bankruptcy.

If you are finding my website for the first time, I have been helping people buy after bankruptcy, foreclosure, short sale or deed in lieu of foreclosure since early 20011.  (Read More)

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Most of my focus has been on helping people buy a home after financial hardship.  As home values have continued to increase, I am getting a lot of questions about refinancing a home that was included in Bankruptcy.

The biggest challenge with finding answers about refinancing after a bankruptcy is the fact that there are many potential scenarios.

Was the mortgage discharged in the bankruptcy?  Are the payments current?  Was there a second mortgage included in the bankruptcy?

This article will explore all of these scenarios, and address much of the misinformation and misunderstandings about how to refinance your mortgage after a bankruptcy.

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Including a Mortgage in Bankruptcy

One of the biggest misunderstandings about including a mortgage in bankruptcy is that you no longer own the home, and that you are basically just renting from the bank.

That is completely untrue.  Including a mortgage in bankruptcy only provides you with certain financial protections in the event of a default on the mortgage.

You still own the home after the mortgage has been discharged, and if you continue to make your payments, the lender cannot take your home away.

If you make all of your payments on the discharged mortgage, and pay the mortgage in full, you own the home free and clear.

Unless ordered by a federal bankruptcy judge, the liens survive the discharge of the mortgage, and you have the option to continue to make payments, and stay in the home.

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If you continue to make your payments on a mortgage included in bankruptcy, you may have the opportunity to refinance that mortgage at a later date.

Bankruptcy Waiting Periods

You are able to refinance a mortgage discharged in a bankruptcy as long as you have met the waiting periods for the type of mortgage you are using to refinance the home.

Chapter 7 or 11 Bankruptcy

  • Conventional Mortgage – 4 years from the discharge, or dismissal date.
  • FHA Government Insured – 2 years from the discharge or dismissal date.
  • VA Guaranteed Mortgage – 2 years from the discharge or dismissal date.
  • USDA Guaranteed Mortgage – 3 years from the discharge or dismissal date.

Chapter 13 Bankruptcy

  • Conventional Mortgage – 2 years from the discharge, or 4 years from dismissal date.
  • FHA Government Insured – 2 years from the discharge or dismissal date.
  • VA Guaranteed Mortgage – 2 years from the discharge or dismissal date.
  • USDA Guaranteed Mortgage – 3 years from the discharge or dismissal date.

Conventional Extenuating Circumstances Exception

There are many articles on the internet that state that Fannie Mae changed it’s guidelines and have shortened the waiting periods after a financial hardship.

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This is not entirely true, and these articles are designed to drive traffic to websites that are trying to collect, and sell mortgage leads to mortgage companies.

What these articles are referencing is the extenuating circumstances exception guideline that states that if the bankruptcy was the result of a one time event that was not in your control, and that event directly led to the hardship, that a shorter waiting period may be used.

The problem with this is that these guidelines are both very vague, and very difficult to document.  I have seen successful exceptions in the following cases:

  • Death or permanent disability of a primary wage earner
  • Lay-off or closing of employer – requires documentation from employer stating reason for lay-off, and receipt of unemployment benefits for a minimum of 6 months.
  • Forced relocation by employer – Move cannot be for a better opportunity that you chose to take advantage of.
  • Divorce resulting in a significant drop of income

If you fall into one of these categories, the waiting period for applying for a conventional loan can be reduced from 4 years to 2.

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Proving Your On-Time Payment History

To be eligible to refinance a mortgage discharged through bankruptcy, you have to show that you’ve been making your payments on-time for at least the last 12 months.

Once your bankruptcy was discharged, the mortgage no longer shows up on your credit report.  I have heard many accounts of lenders stating that you cannot refinance unless you go back and re-affirm the original mortgage.

This could not be further from the truth.  Documenting your on-time payments is actually quite easy.  The lender refinancing your mortgage can simply order a payment history from your current lender.

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Even though the mortgage does not report on your credit, your payments are still being received and documented, and can be verified.

Second Mortgage Included in Bankruptcy

This is an interesting situation, and your refinancing options might surprise you.

If you had a second mortgage included in bankruptcy, and you’ve continued to make payments on your first mortgage but have not made payments on the second mortgage, it is still possible to refinance using a conventional, Fannie Mae underwritten loan.

The key to this is that the second mortgage lien must be removed as a result of the refinance.

If you have enough equity to pay the second mortgage in full, that’s easy. Just pay it off.

If the second lien holder will accept less than the amount owed, that’s also ok.  You just need a pay-off demand from the lender stating what the pay-off is that they will accept.

As long as the second lien holder will remove the lien as a result of the refinance, you would qualify under Fannie Mae guidelines.

My Lender Told Me I Couldn’t Do This

Most people find my website because they speak to a loan officer that does not have experience with these guidelines, or they work for a lender that has chosen to not deal with these types of loans.

Make no mistake, these loans are more difficult to get approved.  There is the additional paperwork of having to provide your bankruptcy petition, bankruptcy discharge, and other court documents to prove that the mortgage was included in the bankruptcy.

Add to that, the fact that almost every situation is different.  For many loan officers and lenders, it’s simply not a good use of their time to work with you.

I know, it’s sad, but true.

Thankfully, you did not take “NO” for an answer, and you’ve found a resource that can help.

Just because a lender tells you that you cannot refinance, does not mean that you do not qualify.  It only means that THEY will not lend under those circumstances.

Need a Second Opinion?

You can catch us most days taking questions through live chat on the lower right corner of this article, or answering questions in the comment section below.

Please feel free to ask any questions below, on chat, or by email.

This is a great opportunity for you to anonymously ask an experienced professional that has no financial interest in how how your question is answered.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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