Chapter 13 Refinance Explained
Paying of your chapter 13 bankruptcy by refinancing your home can lead to substantial savings and get you a fresh start on your credit. Many people that are currently in a chapter 13 bankruptcy don't know that the trustee will approve a home mortgage refinance to pay off the plan if there is an overall benefit. In most cases, the savings are substantial compared to the current monthly payments of mortgage and chapter 13 payment plan.
After you refinance and pay off your chapter 13 plan, you are then completely discharged from the debt under the plan. The credit agencies will then look favorably when you obtain new credit, such as small credit card or car loan, and your credit scores will increase each month if you make your payments on time. The specialized bankruptcy mortgage lenders will also look favorable to you and will offer several mortgage after bankruptcy products the day after you obtain the discharge.
On Time Payments and Credit Repair
The first step to obtain loan approval from a bankruptcy friendly lender is to have made the last 6 payments on time to the trustee and the last 12 payments on time to your mortgage.
As a result of a bankruptcy, there are often errors and updates that need to be updated on a persons credit report. Proper clean up of a bankruptcy effected credit report can lead to improved scores and a much better loan approval. Bankruptcy friendly lenders will require a middle credit score of at least 540 to obtain loan approval if you are currently in Chapter 13.
Then next step is to determine if you have enough equity in your home to pay off the bankruptcy plan and loan costs. Bankruptcy friendly lenders will lend up to 90% of the value of your home. So if 90% of your home value will pay off the current mortgage, the chapter 13 plan and loan fees, you are in good shape.
Once approved for the mortgage refinance, you need to select the loan structure. There are two strategies to choose from: go with a short-term fixed rate period loan that will have the lowest rate or go with a standard 30 year loan term. The difference between these two options is typically 1% in interest rate. The strategy on the short-term is that over the next 2 years, your credit score will have increased to the mid 600's, you will then qualify for a standard market rate, and you can refinance.
Your bankruptcy attorney and trustee approval
Once you have formal lender approval, you make a request to the bankruptcy trustee to pay off your chapter 13 via the refinance loan. Working on your behalf, your BK attorney will take the loan approval, your home appraisal, and the good faith estimate of loan fees to the trustee for review. If the package is complete and the overall payment is lower, the trustee will typically approve the chapter 13 refinance loan. The trustee will then issue a formal approval, and from this point, the mortgage lender can fund the loan within 3-4 weeks.
When the loan funds, all the creditors are paid off, the attorney gets paid, and the trustee will then issue you a formal discharge of all debt on the payment plan. Your next move is to send letters to the credit agencies updating all your accounts. This is a critical step in establishing your fresh start and the beginning of moving your credit scores up. Now that you have a discharged bankruptcy, you will be eligible for new credit after bankruptcy, which will be required to move your credit scores into the low to mid 600's.