Why am I having a hard time refinancing after bankruptcy?

You filed a bankruptcy case to resolve your debts. So why aren’t you qualifying for a refinance on your home mortgage? The title company may be able to shed some light on specific problems but the common culprit may be misperceptions about bankruptcy.

It could be your credit score.

Most underwriting guidelines for new FHA mortgages and FHA home refinances require a minimum credit score of 640 and also waiting at least two years since the discharge order was entered in your chapter 7 case. If you filed a chapter 13, the guidelines require the 640+ credit score and also waiting a minimum of one year since the chapter 13 plan was confirmed with verification from the chapter 13 trustee that all plan payments have been timely made and other obligations have been fulfilled. Typically a credit score improves after bankruptcy since debts are then discharged and no longer reporting as in default. However it takes proactive work and time to improve a credit score, including maintaining current payments on mortgages, reaffirmed auto loans and student loans that survive the bankruptcy case. Pull your credit report at www.annualcreditreport.com (note this site will not give you your credit score). Review the report for negative items. Challenge any inconsistencies or incorrect reporting information. Work to improve your credit by obtaining new credit.

Chapter 13 might be the problem.

If you filed chapter 13 case, it’s critical to understand that debts are not discharged until the plan is complete. Many people have the misperception that debts are discharged upon the chapter 13 plan being confirmed. However debts are not discharged until every obligation under chapter 13 plan is complete including all 3 to 5 years of payments being made. The reason for this is because if your chapter 13 case is dismissed before it is completed, those debts are resurrected subject only to any distributions that have been made by the chapter 13 trustee which reduce the balance owed. So if you are currently in a chapter 13 plan, your debts are still legally operative and owed by you until a discharge is received at the end of the plan. Additionally in chapter 13, the case is typically not closed until five months after you receive a discharge. This means that a chapter 13 case is technically open and active for up to 5 1/2 years, all the while impeding your credit score and your chances for qualifying for a refinance or new mortgage during that time. If you are still in an active chapter 13 plan, some lenders will require the chapter 13 trustee’s approval of the loan.

It could be the judgments obtained against you prior to filing bankruptcy.

While most judgment debts are discharged in bankruptcy (judgments for criminal restitution, child support and other domestic support, or even fraud are often not discharged), the state court system is not updated automatically with your bankruptcy information. In Minnesota, there is a secondary and optional process after you receive a discharge for having the state court docket updated to reflect the pre-bankruptcy judgments were discharged in bankruptcy. This process is called application for discharge of judgment and while it does not require the assistance of attorney, it is fairly affordable and certainly more convenient to have an attorney do this for you. Once the state court docket is updated with the bankruptcy discharge information, these judgments will reflect as discharged on your credit report. If you do not complete this process, the underlying debts are still uncollectible by law however the judgments are still shown as active on the state court docket and thus possibly also on your credit report.

When in doubt, look into your mortgage modification options.

As an alternative to a traditional refinance, consider applying under one of the federal mortgage modification programs. Low credit scores, judgments and even a bankruptcy are less likely to impact your eligibility for a mortgage modification than in qualifying for a refinance. As an additional benefit, the interest rates available through modification programs are often lower than what a poor credit score can achieve in the open market. There is also the added bonus of no refinance fees, since participating in a federal program involves no closing costs either out of pocket or added to your mortgage balance. The federal website that provides a comprehensive listing of all programs is available at www.makinghomeaffordable.gov.

See also Qualifying for a Mortgage After (or During) Bankruptcy: What does it take and how long will I wait?

Qualifying for a Mortgage After (or During) Bankruptcy: What does it take and how long will I wait?

It should come as no surprise that qualifying for a new mortgage or refinance with a bankruptcy in your credit history is likely to complicate the process. But while a bankruptcy will stay on your credit report for a full ten years after your case is complete—which means up to fifteen years total for individuals who file chapter 13—bankruptcy takes its biggest bite on creditworthiness in the first two to three years after the case is first filed.

The good news is that bankruptcy does not automatically disqualify a borrower from obtaining a new mortgage or refinance, and the most available product after bankruptcy usually will be a FHA mortgage (as opposed to a conventional mortgage). The bad news is that eligibility for a mortgage will take time, usually two years or more with reestablished good credit.

As a general rule of thumb, a debtor can qualify for a FHA mortgage or refinance either during or after bankruptcy under the following guidelines:

Chapter 7 or Chapter 11 Bankruptcy: At least 2 years have elapsed since the date of discharge of debts and the borrower has a credit score at least a 640. In most chapter 7 cases, the discharge of debts is entered three months after the case is initially filed.

Chapter 13 Bankruptcy: At least 1 year has elapsed since the filing chapter 13 bankruptcy and the borrower has a credit score at least 640, plus the borrower can provide lender with a verified perfect payment history of their chapter 13 plan. Some lenders may also require the chapter 13 trustee’s approval of the loan.

Note: For conventional mortgage products and rural housing, the typical waiting period may be extended to three years or more and often with higher credit score requirements.

If you filed a chapter 7 or chapter 13 bankruptcy, or you are still in an active chapter 13 plan, work now to increase your odds to qualify for a mortgage product by doing the following:

  • Reestablish a good credit score now. The better the credit score, the lower the interest rate will be. While it won’t happen quickly, you do not have to wait until bankruptcy is complete to work on improving a credit score. Pay your mortgage, student loans, vehicle leases and auto loans on time each month so that you get the benefit of the positive credit reporting. If your student loan is in default, get it back on track with an Income Based Repayment program. Don’t let new debts and bills fall into collection. Check your credit report annually for errors that negatively impact your score. And consider a secured credit card or even a traditional credit card with a low limit—use it sparingly, keep the balance below 10% of the available credit limit or, better yet, pay it off in full each month. If your bankruptcy case is already complete, have the state court docket updated to show any pre-bankruptcy judgments were discharged in your bankruptcy case.
  • If you are in an active chapter 13 plan, ensure your monthly chapter 13 plan payment is made on time each month. For debtors with cash flow problems, this may mean that you set up your monthly plan payments to be automatically deducted from your wages or otherwise have your plan payment made via ACH deduction from a bank account.
  • Be prepared and be patient. At a minimum, most borrowers will have to wait at least two years from when a bankruptcy was filed before they will qualify for a FHA mortgage.

As an alternative for homeowners looking to refinance an existing mortgage who do not meet the underwriting requirements for a traditional refinance, the Making Home Affordable program administered through the federal government may offer a better solution. Obtaining a HAMP or HARP mortgage modification essentially provides the benefit of a cost-free refinance with market interest rates however without the strict credit score/financial history requirements or mandatory post-bankruptcy waiting periods. These programs will not exist indefinitely and as of the date of this post, Congress has approved the Making Home Affordable program only through the end of 2016. To identify the various programs and requirements for a mortgage modification, see the official HUD website on Making Home Affordable.

DISCLOSURE: This information is intended as a general guideline only and is not meant to be a definitive response on any individual qualification for a mortgage or refinance. Mortgage underwriting standards change frequently and only a banking institution or loan officer can determine eligibility for mortgage products.