If you’re considering Chapter 13 bankruptcy, you likely already know that it can stay on your credit report for seven years. That will significantly limit your ability to get any kind of new credit. Of course, your credit report likely is currently in bad shape anyway.
However, what if interest rates drop, and you can save a good deal of money by refinancing your mortgage? Is that out of the question in the years following your bankruptcy filing?
While it may seem like a sad irony that refinancing, which can help you lower your mortgage payments significantly and improve your financial situation as you deal with your Chapter 13 repayment plan, is going to be a challenge. However, it probably is.
That’s not to say that no lender will let you refinance. However, you’ll be subject to stricter criteria than other refinancing applicants. You’ll likely have to wait longer to get approval and the new terms you’re able to get won’t be as advantageous as they would be without the bankruptcy.
By filing Chapter 13 instead of Chapter 7, you establish a three-to-five-year repayment plan that includes making payments on your mortgage. As long as you’re making those payments on time and in full, you’ll eventually be able to refinance if you choose.
Why an FHA loan may be your best chance
People can generally refinance using a government-insured FHA loan earlier than if they try to refinance with a conventional mortgage – at least one year after the bankruptcy if you’ve been responsible with your payments and have a credit score of 500. You do need the bankruptcy court’s permission, however. Financial institutions and other companies that offer conventional mortgages typically require a credit score of over 600.
Refinancing your mortgage shouldn’t be your primary focus after a Chapter 13 filing. However, if you focus on rebuilding your credit slowly and intelligently, you should be able to get it up to the point where you can refinance your mortgage with a conventional loan by the five-year mark.
There’s a lot to think about if you’re considering bankruptcy. While there are some downsides in the short term, it can help you get your finances back on track in the long run and develop some wise saving and spending habits along the way. Having legal guidance throughout the process can improve your chances that it will have ended up being a wise choice.