It is not easy to refinance a mortgage if you have had a bankruptcy or a foreclosure, but the good news is it is not impossible by any means. How easy or difficult it will be will depend upon several factors, such as the type of bankruptcy you had – 7 and 13 are the most common.
But with some extra work and discipline, there is no reason you cannot refinance within a reasonable time of a bankruptcy of foreclosure. Here are some 6 ways to get a mortgage after a BK or loan default:
#1 Refinancing After Bankruptcy and Foreclosures
The majority of Americans file either Chapter 7 or Chapter 13 bankruptcy; the former is the most common. It involves the bankruptcy court imposing a liquidation where most of the debts are wiped out. Chapter 13, on the other hand, sees your debts reorganized, and there is a payment plan set up.
If you want to get an HUD insured mortgage or an FHA refinance, you only need to wait two years after you filed for bankruptcy. For many Chapter 7 cases, you may be able to get a mortgage or to refinance two years after the bankruptcy was discharged.
However, a Chapter 13 bankruptcy does not disqualify you from getting an FHA mortgage, if the lender shows that one year of the pay-out period has gone by and you have made payments on time. Yes there are still government insured mortgage loans for people with bad credit.
If you are looking for a mortgage or refinance from a private lender, you may be able to get a mortgage sooner than two years; you will need to check with various conventional lenders to determine what their standards are.
#2 Clean Up Your Finances
What many people who go bankrupt or experience a foreclosure don’t understand is this: Many lenders do not particularly care if you had one of these events in the last two or three years. While your black marks will stay on your credit report for seven or even 10 years, the credit bureaus see older bad behavior not as unfavorably as recent bad behavior.
What IS important is that you show you have come out on the other side and have your finances in order. If you are thinking about applying for a mortgage in the next year or two, make sure that your current financial profile is clean. Pay all of your bills on a timely basis. Keep your balances under control, and your credit score will rise with time.
#3 Get Your Score as High As You Can
Getting your credit score as high as possible is actually fairly easy: Pay everything on time. Never be late, and keep your credit card balances down. Also, don’t open up too many new accounts within the first year after your bankruptcy or Chapter 7/13.
Getting a mortgage after a bankruptcy or foreclosure is a great way to begin the process of reestablishing your credit.
#4 Consider the HARP Program
If you are upside down on your mortgage, and need to refinance and lower your payment, the HARP program can be very useful. You may have trouble finding a regular lender to work with you because you have no equity and your credit is probably bad.
The HARP program was introduced in March 2009, and it lets borrowers who are underwater on their mortgage to refinance into a lower cost mortgage.
HARP looks for borrowers with LTV ratios that are no higher than 80% and have few late payments over the last 12 months. This program could be appropriate for you if you had a bankruptcy or foreclosure at least a year ago, and held onto your home.
This can be a good program for many in trouble borrowers because you do not need to get a new appraisal in many cases. With HARP, you may be able to get a lower rate, a shorter term loan, and also change from an adjustable to fixed rate mortgage. And of course, you do not need to have a minimum credit score.
What you will need with HARP is to have a steady payment history for at least the last year.
#5 Save for Down Payment
If you want to get lenders to take a chance on your after a foreclosure or bankruptcy, you can convince them by coming to the table with at least 10% down, and 20% is better.
If you show that you have more money in the deal, the lender may be more likely to approve for a mortgage after a foreclosure or bankruptcy. $0 down home loans are extremely difficult to secure after a bankruptcy or foreclosure, so start saving for a down-payment.
#6 Try to Have a Co-Signer
If possible, get a co-signer on your home loan so that you can qualify. Just make sure that you will always make the payments on the home or you will damage your co-signer’s credit.
The Bottom Line
No matter what you hear, you do NOT have to wait seven years after a bankruptcy or foreclosure to be approved for a refinance mortgage. You mainly just need to wait two years or so, and reestablish a clean financial history.