After emerging from bankruptcy, you might want to begin putting your finances in order. One way homeowners reduce their monthly mortgage payments is by refinancing to take advantage of lower interest rates. While it is possible to refinance your mortgage after a bankruptcy discharge, there is a waiting period. Below, our Roseville bankruptcy attorney from The Bankruptcy Group discusses the effect each type of bankruptcy has on your ability to refinance, along with some other considerations.
The Differences Between Chapter 13 and Chapter 7 Bankruptcies in California
Your ability to refinance your mortgage will be impacted differently depending on what chapter of bankruptcy you filed.
Many people file for Chapter 7, which is often called a liquidation or traditional bankruptcy. A debtor in Chapter 7 will discharge a vast majority of their debt, including medical bills, credit card balances, and personal loans. However, certain debts, such as student loans, alimony, child support, and most taxes, will survive. A debtor might have to turn over some of their property to a court-appointed trustee to be sold. However, California provides many protections, or exemptions, that allow a debtor to keep most, if not all, of their property. Each case is unique, so it is critical to speak with an experienced California Chapter 7 bankruptcy attorney before filing.
A Chapter 13 allows a debtor to restructure their debt, discharging some debts while paying other creditors through a court-approved bankruptcy payment plan. What debt will be eliminated and what debt will have to be paid depends on numerous factors, including the debtor’s assets, income, and the type of debt.
Waiting Periods in California for Refinancing Your Mortgage Based on the Type of Bankruptcy
Once your bankruptcy is discharged, you will have to wait until a set waiting period is over before refinancing your mortgage. The exact time depends on the chapter of bankruptcy and the type of mortgage.
If you filed for Chapter 7, you will have to wait a minimum of two years before refinancing your mortgage. This two-year waiting period applies to government-backed loans, such as FHA loans. If you have a conventional loan, the waiting period will probably be four years. Remember, the waiting period begins with your discharge date and not the date you filed. If you have a question concerning the exact date, contact your Sacramento bankruptcy lawyer.
If you filed for Chapter 13, you could qualify for refinancing the day after your discharge if you have a government-backed VA loan. If you have a conventional loan, you will be required to wait two years. FHA loans have a waiting period of one year. However, a debtor must have verification that all their bankruptcy payments were paid on time.
If you filed for two bankruptcies over the previous seven years, you will have to wait five years to refinance. The type of chapter or loan does not matter.
Other Considerations When Refinancing a Mortgage After a California Bankruptcy
The waiting period is only that – a waiting period. You still will have to qualify for a refinance. Because filing for bankruptcy negatively impacts your credit score, you might have difficulty refinancing your mortgage after the waiting period has ended. This is especially the case if you filed for Chapter 7.
Chapter 7 stays on your credit report longer. Furthermore, none of your previous creditors were paid – unlike Chapter 13. Nonetheless, you should use this period to work to build your credit score. Our Orange County bankruptcy attorney can provide guidance and strategies to rebuild your credit score after filing or discharge.
Remember, you will still have to pay the closing costs. There is a good chance if you have just come out of bankruptcy that you do not have a significant amount of savings. Closing costs are usually two to three percent of your mortgage loan.
Loan Modifications During a California Bankruptcy
Another option available to an individual who filed for bankruptcy is a loan modification. If you were behind on your mortgage when you filed for bankruptcy, you could be eligible for a mortgage modification.
Depending on your lender, a mortgage could be modified in a variety of ways. In a principal reduction modification, your lender will forgive a portion of the mortgage’s total amount while offering a new monthly payment. Part of your principle could be ignored in a principal forbearance. However, you will be required to pay this amount at the end of the loan or when you sell or refinance your home.
The most common loan modification is the capitalization of your arrears. Your lender will take any missed mortgage payments, including any incurred fees, and add them to the end of your loan. Additionally, you could be offered a lower interest rate, lowering your monthly mortgage. In some cases, your monthly payment could increase.
Unlike refinancing your mortgage, there is no waiting period to modify your loan. You could even apply for a loan modification while in bankruptcy. However, the bankruptcy court would have to approve your loan modification. Loan modifications typically occur in Chapter 13 bankruptcies. Speak with our knowledgeable Folsom bankruptcy attorney regarding applying for a loan modification.
Call Our California Bankruptcy Attorney Regarding Refinancing Questions
Refinancing your home mortgage could save you a significant amount of money each month. If you have filed for bankruptcy, you will be required to wait anywhere from one to five years, depending on the chapter of bankruptcy and the type of loan, before you are eligible to apply. While this appears to be an inconvenience, you would have probably not qualified for refinancing before your file for bankruptcy. Bankruptcy could be the tool you need to put you in a financial position to refinance your home. Contact our Roseville bankruptcy attorney to discuss your options. Call The Bankruptcy Group at 888-710-4334.