Refinancing Your Mortgage During a Chapter 13 Bankruptcy
It is possible to refinance a home loan while in Chapter 13 bankruptcy, though there are hurdles that make the process more difficult. The eligibility requirements are fairly strict. The debtor must get pre-approval from the bankruptcy court. Refinancing under Chapter 13 also takes longer and requires additional paperwork. However, the result can be worth the effort.
Chapter 13 debtors refinance homes for a variety of reasons. Interest rates may have dropped since the debtor took on the loan, so refinancing may save significant interest costs. A debtor might also want to refinance while still in Chapter 13 if mortgage rates are rising. Another scenario is that the debtor’s equity in the property has increased substantially by way of home price appreciation and/or paying down the debt. Refinancing can help the debtor cash out some of the equity and put it to good use elsewhere, possibly ending the Chapter 13 plan early.
While the eligibility requirements vary from lender to lender, debtors applying to refinance a home while in Chapter 13 are usually judged by the following criteria:
- Payment history — Lenders want to see a credit history with at least a full year’s worth of no late Chapter 13 plan payments and no other bill payments missed or late.
- Credit score — Most lenders require a credit score (FICO) of 580 or better.
- Home equity — All lenders require that the refinancing homeowner have equity in the property. The typical minimum home equity is 2.5 percent to 3.5 percent for a simple refinance, one that modifies the duration and interest rate of the loan. A lender will likely require 15 percent or more home equity for the refinancer to take away cash from the deal.
- Debt-to-income ratio — Lenders will verify the refinancer’s ability to make the payments as determined by his or her debt-to-income ratio (total periodic debt payments divided by total income in the same period). Most lenders require that the ratio be no more than 43 percent.
- Court approval — The bankruptcy court must pre-approve any refinancing. The first step is for the debtor to apply to the U.S. bankruptcy trustee for consent. This entails supplying proof that a new loan is in the creditors’ best interests and within the debtor’s means to pay. The trustee, if convinced, makes a positive recommendation to the bankruptcy judge. If the refinancing is contested, the debtor may have to provide additional supportive evidence.
A successful Chapter 13 home refinance can save money, allow more financial flexibility and help the debtor repair his or her credit. The debtor’s bankruptcy counsel can play an essential role in making a refinancing happen.
The Law Offices of Michael Jay Berger is one of California’s most experienced and highly regarded bankruptcy and debt relief law firms. Whether you are considering or are already in a Chapter 13 bankruptcy, feel free to contact us online or call 310-271-6223 to schedule an initial consultation.