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?