Can You Refinance Your Mortgage After Bankruptcy?

If you’ve faced financial hardship and filed for bankruptcy, you might think you have little chance of refinancing your mortgage. Fortunately, bankruptcy doesn’t disqualify you from refinancing, though it may require you to wait a few years, and it may make getting the best terms on your new loan more difficult.

What Is Bankruptcy?

Bankruptcy is a legal process for people overwhelmed with debts that they have little hope of repaying. The process is designed to give people who honestly got in over their heads with debt a way to discharge those debts — often by liquidating their nonessential assets or setting up a repayment plan.

Your credit score will take a huge hit when you file for bankruptcy. Expect your score to drop as much as 200 points. Bankruptcies remain on your credit history for seven to 10 years, and while the effect on your credit score will diminish over time, you’ll likely need time to rebuild your score after bankruptcy before you’ll be able to meet minimum requirements for refinancing your mortgage.

In the United States, federal courts have exclusive jurisdiction over bankruptcy matters. There are two primary types of personal bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy

Often called liquidation bankruptcy, Chapter 7 bankruptcy involves a trustee selling the debtor’s assets and using the proceeds to pay off their creditors. It is the most aggressive and financially damaging form of personal bankruptcy.

When a person files for Chapter 7 bankruptcy, they submit all their financial information, including assets, income, debts, and other liabilities. A trustee is appointed to administer the case and determine which assets will be sold, and how the proceeds will be distributed among creditors.

At the end of the process, the debts are discharged, and the debtor is freed from any further obligation to repay them.

Assets commonly sold in bankruptcy to pay off debts include:

• Investment properties or second homes.
• Valuable artwork.
• Expensive clothing or jewelry.
• A newer car with equity.
• Nonretirement investment accounts.

Exemptions are in place to protect assets you need to work and live, such as your primary residence and a vehicle. Some debts are ineligible for discharge or are very difficult to discharge, such as alimony or child support payments, and certain student loans.

Chapter 13 bankruptcy

Known as reorganization bankruptcy or a wage-earner’s plan, Chapter 13 bankruptcy lets debtors come up with a plan to pay some or all of their debts over a period of three to five years. While the debtor is creating the plan or making payments, creditors are unable to start or continue efforts to collect the debts.

Once the debtor’s repayment plan is approved by the court, a trustee is appointed to administer the case, and ensure regular payments to creditors. In most cases, you can retain your assets while working toward settling your debt. This means you can protect your home from foreclosure in the right circumstances.

The debts are discharged once the repayment plan has been completed.

What Is Mortgage Refinancing?

Mortgage refinancing is when a homeowner takes out a new mortgage to replace their existing one. Usually this is done to save money in some way — a lower interest rate or a reduced monthly payment — or to borrow home equity with a cash-out refinance, home equity loan, or home equity line of credit.

It involves applying for a new mortgage, either with your current lender or a new one, and you must meet the requirements for that loan, including standards for your loan-to-value ratio, credit score, and debt-to-income ratio.

Refinancing After Chapter 7 Bankruptcy

If you’re filing for Chapter 7, you may wonder, How long after bankruptcy can you refinance your home? Unfortunately, you probably can’t refinance right away, and you likely need to wait a couple of years.

If you’re eligible to refinance, you’ll need to prove to lenders that you’re on solid financial footing. Here are a few of the requirements needed to refinance common loan types.

Conforming conventional loans

In most cases, you need to wait two to four years after your Chapter 7 bankruptcy filing or discharge date to refinance a conventional loan. Many lenders use the filing date to start the waiting period, since courts typically resolve Chapter 7 bankruptcies within four to six months.

“Lenders may also request your bankruptcy discharge papers and proof of improved financial management,” says Brock Cassidy, the New York City-based chief revenue officer of Newzip, an online platform that connects mortgage lenders with real estate agents. “Since bankruptcy impacts your credit and raises lender concerns, you’ll need to provide additional documentation.”

Jumbo loans

Bankruptcy guidelines for nonconforming conventional loans, commonly known as jumbo loans, vary by lender. You typically have to wait seven years after the bankruptcy filing date or discharge date before refinancing.

Since most jumbo mortgages aren’t backed by the government, lenders assume all risk for these loans. You can expect strict financial qualifying standards and a higher credit score requirement when refinancing a jumbo loan than for other loan types.

FHA loans

In most cases, you must wait two years after the bankruptcy discharge date before refinancing with a loan backed by the Federal Housing Administration. You also will need to meet the minimum credit score requirement, and show proof of your financial stability.

VA loans

Veterans Affairs loans offer flexible guidelines, but most lenders require you to wait at least two years after the filing or discharge date to refinance with a VA loan.

You’ll need to meet eligibility requirements before you can refinance. VA loans have no minimum credit score requirement, but lenders may set a minimum credit score after bankruptcy.

USDA loans

The waiting period to refinance a U.S. Department of Agriculture loan is generally three years after bankruptcy. The USDA doesn’t consider a Chapter 7 bankruptcy an adverse credit event if the discharge or dismissal date is more than 36 months old when you apply for a mortgage refinance. You also may need to meet the loan’s financial and credit score criteria.

Refinancing After Chapter 13 Bankruptcy

Since Chapter 13 bankruptcy requires a repayment plan, the mortgage refinancing process is different from Chapter 7 bankruptcy. Waiting periods are shorter for most loan types, and you’ll have to show you’ve made at least 12 on-time qualifying mortgage payments.

Here are some basic requirements for each type of refinance.

Conforming conventional loans

In most cases, you’ll need to wait two years after the discharge date or four years after the dismissal date to refinance your mortgage. Discharge is when the court eliminates a debt. Dismissal is when the court rejects your case without relief, and you still are liable for your debts.

Lenders require proof of 12 on-time qualifying payments — according to your repayment plan — and a minimum credit score of 620.

If you fail to meet the terms of your repayment plan, the court might dismiss your bankruptcy, and you may have to wait another four years to refinance after the new dismissal date.

Jumbo loans

As with Chapter 7, most lenders require a waiting period of seven years for jumbo loans after the dismissal or discharge date of a Chapter 13 bankruptcy.

If you live in a high-cost area, some lenders may approve a refinance after four years if you can show you’ve improved your finances, maintained stable employment, improved your credit score, and increased your cash reserves.

“A strong savings account can act as an insurance policy, showing lenders you have a safety net,” says Damon Duncan, an attorney and specialist in consumer bankruptcy at Duncan Law in Greensboro, North Carolina. “Post-bankruptcy, having a financial cushion can enhance your eligibility for refinancing.”

FHA loans

You’re eligible to refinance an FHA loan one day after the discharge or dismissal date of your Chapter 13 bankruptcy if you’ve made satisfactory qualifying payments. You still will need to meet minimum credit score requirements, which may be difficult after a bankruptcy.

VA loans

VA guidelines suggest a one-year waiting period after a Chapter 13 bankruptcy. Keep in mind you may need to work on improving your credit score before you can refinance your VA loan at a good interest rate.

“Rebuilding credit is essential for homeowners looking to refinance post-Chapter 7 and Chapter 13 discharge,” Duncan says. “Regular payments and responsible credit usage are key to demonstrating financial reliability.”

USDA loans

You can refinance a USDA home loan 12 months after the dismissal or discharge date of a Chapter 13 bankruptcy. It’s important to note that these are general guidelines, and specific credit, income, and employment requirements vary by lender and your own financial circumstances.

“Identifying and working with lenders familiar with post-bankruptcy scenarios can dramatically increase chances of successful refinancing,” Duncan says. “Their understanding of unique circumstances can make all the difference.”

Chapter 7 vs. Chapter 13 Waiting Periods

The waiting periods for Chapter 7 and Chapter 13 bankruptcies are generally two years and four years for conforming loans and seven years for jumbo loans, respectively.

Requirements for Refinancing After a Bankruptcy

There are no universal requirements lenders must follow for refinancing a mortgage after bankruptcy. Requirements will vary by lender and loan type.

Here are some general requirements lenders will want you to meet to improve your chances of getting a refinance loan after bankruptcy:

• Minimum credit score: In most cases, you’ll need a minimum credit score of 580 for an FHA loan, and 620 for a conventional loan.
• Maximum DTI ratio: Your DTI ratio must be at or below a certain threshold, usually 43%. You can use a DTI ratio calculator to get a handle on your numbers. Your lender sets these thresholds for a refinance after bankruptcy.
• Cash reserves: You’ll typically need a minimum of six months’ worth of cash reserves to cover your monthly mortgage payment.
• LTV ratio: Your LTV ratio is the percentage of your home’s value that you’re borrowing. In most cases, you’ll need to leave 20% equity in your home to refinance a conventional mortgage after bankruptcy.
• Documentation: You’ll need to provide refinance lenders with documents, such as recent pay stubs, bank statements, tax returns, and proof of funds letters that show you have the resources to complete the sale and afford the loan. You may need to provide a letter explaining the financial circumstances that led to your bankruptcy.

How To Refinance After a Bankruptcy

When your waiting period ends, you can start the refinancing process. Finding mortgage companies that will refinance after Chapter 7 is relatively easy. Thousands of people want to refinance after bankruptcy, and many lenders are ready to meet that need.

1. Choose a lender and apply

Start with lenders that offer refinancing to homeowners with a bankruptcy. Compare terms, interest rates, and eligibility criteria. Once you choose the right refinance lender for you, collect your documents, and submit your application.

2. Lock in your interest rate

Interest rates fluctuate, so consider locking in your rate when you find an attractive offer. This prevents potential rate increases during the loan processing period.

3. Have your home appraised

An appraisal determines the current market value of your home. To qualify for refinancing, your home’s value should be sufficient to support the new loan amount and maintain an acceptable LTV ratio.

4. Complete underwriting

Mortgage underwriting is a thorough assessment of your finances and creditworthiness. Be prepared to provide your lender with additional documents.

5. Close on the loan

Once all requirements are met and your application is approved, you’ll proceed to closing. At the closing, you’ll pay your refinance costs, and sign the necessary paperwork to finalize the refinance process.

Alternatives to Refinancing After Bankruptcy

If you’re unable to refinance after bankruptcy, consider these alternatives to improve your financial footing.

Rebuild your credit

Work on rebuilding your credit so you can qualify for better interest rates and loan terms when you’re ready. Pay your bills on time, and check your credit report for errors. If you find an error, correct it.

Work with your mortgage lender

Many lenders offer specialized loan-repayment programs for homeowners who recently filed for bankruptcy. Your lender can lower your interest rate, extend your loan term, or reduce the principal balance of your loan. This is known as a mortgage loan modification.

You also can ask your lender to pause or lower your payments for up to six months. This is known as a forbearance. Your lender might approve your request if you’ve experienced a financial hardship like a job loss or unexpected health care costs.

Seek expert advice

Talk to a financial advisor. Many cities, counties, and states provide free or low-cost advisory services for people who are struggling financially.

Tim Melia, a certified financial planner with Embolden Financial Planning in Seattle, says the focus should be on developing smart financial habits.

“No matter the waiting period, the primary focus likely needs to be on establishing good long-term financial habits that will also help increase a person’s credit score,” he says. “Paying bills on time, avoiding opening new accounts, obtaining a secured credit card, and keeping an eye on the credit score are ways to do this. It may take a while, but this will all help with an eventual refinance.”

FAQ: Refinancing After Bankruptcy

Here are answers to common questions about refinancing after bankruptcy.

The Bottom Line on Refinancing After a Bankruptcy

While refinancing after bankruptcy presents challenges, it is possible. Understanding the requirements and waiting periods is crucial. Immediately begin rebuilding your credit after you file bankruptcy, and explore alternatives to refinancing like a loan modification or forbearance. Remember, each reason for bankruptcy is unique, so consult a financial planner or mortgage expert to find a solution that works for you.