Home Refinancing After Bankruptcy
A home refinancing after bankruptcy can ease the monthly budget or prove to be another financial mistake. People go into bankruptcy for all kinds of reasons. Some get into financial difficulties after an extended job loss or because of a medical emergency. Others have gone through devastating loss due to natural disasters such as violent hurricanes and raging forest fires. Still others just don't seem to understand the basic principle that income has to exceed outgo. In keeping with the federal Bankruptcy Code, individuals usually file for Chapter 7 or Chapter 13 bankruptcies. In Chapter 7, the individual has few assets and all debt is typically written off. Though the individual gets some relief from creditors, the financial consequences continue for a long time. The Chapter 7 stays on the person's credit file for ten years. This can mean paying higher interest rates on car loans and home mortgages for a long time to come. Almost certainly, the interest rate on a mortgage for a home refinancing after bankruptcy will be higher than average.
The black mark might also affect job opportunities and automobile insurance rates as both employers and insurance companies may investigate an applicant's credit history. In Chapter 13, the individual sets up a court-approved payment plan for paying off all obligations within a three- to five-year schedule. Some obligations, such as credit card balances, may be reduced as part of the payment agreement. A Chapter 13 stays on a person's credit history for seven years. This individual may be the better candidate for a home refinancing after bankruptcy because potential creditors look more favorably on a Chapter 13 than a Chapter 7. The creditors recognize and appreciate that the person is making an effort to repay obligations rather than walking away from them. The writer of Proverbs wrote these encouraging words: "When wisdom entereth into thine heart, and knowledge is pleasant unto thy soul; Discretion shall preserve thee, understanding shall keep thee" (Proverbs 2:10-11). Everyone makes mistakes, but the wise person learns those hard lessons so that he doesn't repeat them. Help on money issues is available through financial counseling and other resources such as numerous books, through churches, nonprofit organizations, and government agencies.
The Chapter 13 individual might be able to arrange a buy-out or cash-out as part of the payment agreement. This refers to a specific type of home refinancing after bankruptcy that pulls out a portion of the property's equity. These funds may be used to pay off other creditors. However, the loan to value is typically limited to 85% of the property's appraised value. This means that the homeowner could refinance and obtain a new loan for $85,000 on a property appraised at $100,000. If the homeowner owes significantly less than $85,000 on the original mortgage, this might be a good option. However, if the homeowner's total mortgage amount (the first plus any second or home equity lines of credit) is close to or more than $85,000, than this option for home refinancing after bankruptcy obviously doesn't apply. The homeowner also needs to consider closing costs and the possible affect of private mortgage insurance (PMI). As long as the first mortgage remains less than $80,000, PMI is not required. But once the loan crosses that threshold, lenders require PMI which increases the monthly obligation. Borrowing 85% of a home's value means paying extra each month in PMI.
Recent changes in bankruptcy legislation require financial counseling both as a requirement for going into Chapter 7 or Chapter 13 and for coming out of these processes. The counseling is designed to help individuals make better financial decisions in the future and to improve their creditworthiness. Before applying for home refinancing after bankruptcy, it's a good idea to obtain copies of one's credit report from each of the three major reporting agencies. Federal law allows one free report from each agency on an annual basis so this is the time to set up a regular schedule for obtaining, reviewing, and monitoring these reports. Individuals want to be sure that there are no mistakes on the reports and, if there are, that these errors are corrected as quickly as possible. Someone who has gone through bankruptcy has two important tasks: to rebuild his credit history and to save money. Though the tasks might not be easy to accomplish, both are achievable by keeping careful track of expenses and paying bills in a timely manner.
A person should wait at least six months before applying for home refinancing after bankruptcy. However, experts suggest waiting at least two years if possible. This gives the individual time to rebuild credit and show a record of making payments as obligated. When the time comes to refinance, the homeowner may want to contact her current mortgage lender first. This institution may provide the best overall loan product, particularly if the homeowner hasn't missed making any payments. Even so, this is not the time to rush into any contract. Individuals need to comparison shop both interest rates, lender fees, and closing costs to find not only the best deal, but a mortgage that improves their current financial situation. As tempting as it may be, this is probably not the time to tap into the property's equity except under the most necessary circumstances. The goal of a home refinancing after bankruptcy should be to improve ones financial stability, not increase ones overall debt to an unmanageable level. By learning the hard lessons of budget management, going through the process of rebuilding creditworthiness, and patient comparison shopping, a motivated person can achieve financial stability after bankruptcy.
Bankruptcy Mortgage LendersBankruptcy mortgage lenders offer some hope to individuals who are trying to buy a home after a bankruptcy. Some lenders advise potential customers to wait two years before applying for a new mortgage. Obtaining a home loan sooner will probably mean having to pay a large down payment and paying higher interest on the funding. Bankruptcy mortgage lenders encourage their clients to work on reestablishing credit and making all payments on time after the discharge of the bankruptcy. Recent good credit can help in getting an approval on funding for a home. Some non profit organizations offer help with making a down payment on a home. The funds are usually from government grants and some do not have to be paid back but the applicant must qualify according to the terms through payment assistance programs.
The main reasons for denial when trying to buy a home vary depending upon the underwriters with the lender. Bankruptcy mortgage lenders have guidelines that a customer has to fit into in order to qualify for funding. The underwriters may believe that the customer is just too much of a risk to approve. If an applicant gives false information to the mortgage company this could lead to a denial for funding. The applicant needs to be certain that the information that they provide during the application process is accurate. Overstating income levels will probably lead to a denial. Overstating property value is another reason that banks turn down funding. Applying with more than one mortgage company can lead to a denial. Sometimes it is better to persevere and be content in a situation before opting for something new. "Not that I speak in respect of want: for I have learned, in whatsoever state I am, therewith to be content" (Philippians 4:11).
The best things that a person can do to get ready to purchase a home is to learn to live on a budget, start saving, and do not live on credit. Bankruptcy mortgage lenders often recommend waiting awhile to apply for funding so that there is time to build financial history and raise credit scores. An applicant will have much more success in being approved for financing if he or she has enough money saved for the down payment. Not living on credit will help the applicant to not become overextended or have high debt to income ratios. Debt to income ratios are an important consideration on approving financing. Normally if an individual has over 40% of his income going to debt he or she will probably not get approved for funding.
Favorable credit scores for obtaining an approval on home financing with banks is generally above 650. Bankruptcy mortgage lenders may be able to provide funding for someone who has a credit score lower than 650. A borrower does have some options and the options may vary depending upon who is providing the funding. A credit score lower than 650 could result in higher interest and steeper payments that are not affordable. Some financial institutions will suggest that a borrower take some time to work on raising credit scores before applying for funding. Others may have a credit repair program that will work with the borrower to repair credit and raise scores before an application is submitted.
Credit repair is not as difficult as it may sound. The best way to repair credit is by obtaining a free annual copy of financial history from all three major credit bureaus. A dispute letter or form can be used to dispute any items that are wrong. The bureaus have 30 days to answer any disputes. Sometimes a negative item may be completely removed from the report. Other times the account in question may be answered as legitimate and will remain. Bankruptcy mortgage lenders generally ask that their potential customers take at least six months to work on repairing financial history before applying for a home mortgage. This should give ample time to dispute all of the questionable items and hear back from the bureaus. A consumer can add a statement to their financial history on any items that are not handled satisfactorily.
Items on financial history that were covered in the bankruptcy should be so noted on the report. A borrower should look out for items that are listed twice, once by the creditor, and once by a collection agency and these should be disputed as being listed twice. Bankruptcy mortgage lenders will look over one's financial history and may point out things that can make a difference on getting approved for financing. Some of the things that can affect one's score include too many inquiries for new credit, past due accounts being listed twice, too many high interest credit cards that are maxed out, and too many late payments on existing accounts. After bankruptcy a person would do well to not apply for new credit unless it is to have one account with a low limit that can help to reestablish financial history.
Some financial institutions have some flexibility for those who have difficulty being approved for a home loan. Bankruptcy mortgage lenders advertise that low credit scores are not a problem and that medical bills on financial history are not a problem. Some even advertise that a person does not have to satisfy judgments against him or her and that the amount of income does not matter. These types of deals can be found on the Internet by doing a search. The borrower should make sure that these are legitimate and are a good deal before signing a contract. Do some research and talk to a financial advisor before making a final decision on whom to go with for funding.