When Can You Refinance After Bankruptcy?

So you need to refinance your home, but you filed for bankruptcy recently. Most lenders will make you wait at least a year — and maybe up to seven years — before you can apply for a new refinance loan. 

Your waiting time will be affected by the type of bankruptcy you filed and the type of loan you need. 

That said, waiting won’t guarantee you can refinance. Completing the waiting period opens the door to your loan application. Once inside, you’d still need to meet the refi’s credit and income requirements.

How long is the waiting period after a bankruptcy?

Your waiting period before refinancing depends, in part, on which kind of bankruptcy you filed. Most consumers file either Chapter 7 or Chapter 13 bankruptcy:

Chapter 7 Bankruptcy

This version of bankruptcy sells your property and uses the proceeds to pay off your debts. Ordinarily, you can keep the house and one car. But additional property — second homes, fine jewelry, boats, additional vehicles, and the like — will be sold for cash to pay your debts. 

Before you can refinance into one of the following loan types after Chapter 7, you must wait at least:

• 2 years: To refinance into an FHA or a VA loan, including streamline refinances
• 3 years: To refinance with a USDA loan
• 4 years: For a conventional loan refi
• 7 years: For a Jumbo loan, one that exceeds the area’s conforming loan limit

The clock on your waiting period starts when your Chapter 7 case discharges — not the day you file. The discharge happens at the end of bankruptcy proceedings. A Chapter 7 bankruptcy could be discharged within a few months. 

Chapter 13 Bankruptcy

Chapter 13 restructures debt. Then, the bankruptcy filer makes monthly payments under the new debt structure. People who file Chapter 13 may need to make settlement payments for several years before their bankruptcy case can be discharged. Because of this, Chapter 13 cases take longer to discharge than Chapter 7 cases, on average.

But, this won’t always mean waiting longer to refinance a mortgage after Chapter 13. Some Chapter 13 filers can refinance before their bankruptcy case discharges. After they make on-time mortgage payments — and on-time payments on their debt settlement — for at least one year, Chapter 13 filers can apply for a refi. 

This works only when applying for government-backed loans such as FHA, USDA, and VA loans. Typical conventional loans — loans not insured by the federal government — will still require borrowers to wait two years after their Chapter 13 case discharges.

Here are the official Chapter 13 wait times:

• 1 year from filing: To refinance with a government-backed (FHA, USDA, VA) mortgage — for borrowers who have made on-time mortgage and bankruptcy payments for at least a year   
• 2 years from discharge: To refinance with a conventional loan
• 7 years from discharge: To refi with a Jumbo loan, a mortgage that exceeds the area’s conforming loan limit — $766,550 in most areas

Deciding between Chapter 7 and Chapter 13? There’s more to consider than mortgage wait times. An attorney can help you decide which type of bankruptcy best meets your specific needs. 

Why do you have to wait to refinance after bankruptcy anyway?

It may feel like a form of punishment — like the lender is piling on — when a homeowner who has filed for bankruptcy gets told to wait before they can apply to refinance. 

In reality, it’s not personal. Lenders enforce waiting periods because they need mortgage borrowers to have stable financial lives. 

Chapter 7 and 13 help consumers recover after their personal finances have gone off the rails. But the recovery process takes time, and success isn’t certain. A new mortgage can add to this financial uncertainty, especially in the first year or two of the new loan. In those early months the loan’s balance may be almost as high as the home’s value, meaning a default would cost the lender. 

This is why government-backed loans look more favorably on recent bankruptcy. The federal insurance built into these loans shields the lender from the risk.

When waiting isn’t enough: Refinancing after bankruptcy

Waiting the allotted time after a bankruptcy means you can apply for a refinance loan. But waiting doesn’t guarantee loan approval. To get approved, borrowers still have to meet their lender and loan program’s requirements just like any other borrower.

Typically, borrowers with stable finances sail through the loan underwriting process. Of course, people who recently filed bankruptcy don’t always have the most stable finances. 

So, if you’ve filed for bankruptcy and you’re waiting to refinance, work on building a more stable financial life while you wait. This will help you get a new loan with more favorable terms once you’re cleared to apply. Here are the benchmarks lenders care about:

Credit score

Conventional lenders typically look for FICO scores of at least 620. FHA loans allow scores as low as 580. VA loans don’t specify a minimum, but lenders usually look for 620. Many USDA lenders want to see 640 or higher.

While a bankruptcy will stay in your credit file for seven to 10 years, its impact should grow smaller as the years pass. If you use this time to build new credit history, you can raise your credit score faster.

To do this, pay your bills — especially loans and credit cards — on time each month, and try to keep accounts open once you’ve paid them off. Avoid buying new stuff on credit.

Debt-to-income ratio

Paying off debt will also help lower your debt-to-income ratio, or DTI. This number compares your monthly debt load to your monthly income. Lower DTIs look better to lenders. 

DTIs of 36 percent or lower work for conventional lenders; FHA lenders look for 43 percent, and they may allow higher DTIs — maybe as high as 50 percent — in some cases.  

You can lower your DTI in one of two ways: paying down debt or earning more money each month. Refinancers could also call in backup in the form of a co-borrower who has a healthy income and little to no debt. 

Employment history

Lenders like borrowers who have a stable work history. The word “stable” typically means two years in the same job or the same profession. Many lenders will consider borrowers with one year in the same job.

The best way to create stability: Stay put in your job until after you’ve applied for — and closed on — the new refinance loan. 

Is refinancing the right thing to do right now?

Filing for bankruptcy means you’ve had some tumultuous times with money. But you’ve managed to hang onto the house or else you wouldn’t be trying to refinance it. That’s good.

Refinancing the home could continue to calm the financial storm, or it could create more stress in the future. It’s up to you to know the difference — to make sure your new loan improves your financial outlook by offering one of the following:

1. Lower monthly payments

Getting lower payments is a common reason for refinancing a mortgage. Borrowers can get lower payments by locking in a lower interest rate or by spreading the mortgage debt across a longer loan term. 

Spreading the debt across a longer term can save hundreds of dollars per month. But there’s a catch: The longer term requires a lot more long-term interest — sometimes hundreds of thousands of dollars more in interest across the life of the loan. 

Still, if you’re struggling to keep the house because the payments are too high, paying more long-term to get a monthly payment you can afford may be worthwhile. 

2. Less interest paid over time

Can you afford a higher monthly payment now that you’ve completed bankruptcy proceedings and no longer face debilitating debt? If so, you could save tens or even hundreds of thousands of dollars by refinancing into a shorter loan term.

Here’s an example that compares a 30-year loan term to a 15-year term, both at 7 percent interest:

	Mortgage debt	Monthly payment* (Principal + Interest)	Lifetime interest collected
15-year loan term	$300,000	$2,697	$185,367
30-year loan term	$300,000	$1,996	$418,527

* Monthly payments do not include extra charges for property taxes, homeowners insurance, 

or mortgage insurance. 

Paying the debt off in 15 years adds $700 to the monthly payment but saves more than $233,000 in lifetime interest compared to the 30-year loan term — assuming you pay off both loans on schedule. 

3. Getting cash out

Refinancing gives homeowners a chance to borrow against equity already built up in the home. Equity is the part of the home that’s already paid off. Say your home is worth $300,000 but you owe only $150,000 on the mortgage. The $150,000 you don’t owe is your equity. 

A cash-out refinance borrows against this equity. If you owed $150,000 on a $300,000 home, you could get a new mortgage of $240,000. You’d use $150,000 of the $240,000 to pay off the current mortgage, leaving $90,000 as cash at closing, less closing costs.

There are other ways to borrow against equity. Home equity lines of credit, or HELOCs, and home equity loans borrow against equity without refinancing the entire mortgage debt. 

4. Eliminating a co-borrower

If someone cosigned on your original mortgage but now you want to remove that co-borrower, refinancing may be necessary. This happens a lot because of divorce, but there are other reasons to do it. Some couples want one spouse to be free of the mortgage debt so they can invest in rental properties or help an adult child buy their first home.  

Should you refinance after a bankruptcy?

For Americans dealing with cascading debt, with no solution in sight, filing bankruptcy pulls the escape hatch. This solution comes with a cost — a credit score hit and difficulty borrowing in the future along with court and attorney fees. The costs can be worthwhile when bankruptcy creates future stability.

Refinancing can create more financial security by lowering monthly payments and helping consumers keep their homes.

When the time is right to refinance after a bankruptcy, shop around to find the best deal. Paying less in interest and fees limits unnecessary debt for years or decades into the future.