This article will discuss and cover refinancing during Chapter Bankruptcy repayment plans on FHA and VA loans. FHA and VA loans are the only two mortgage loan programs that allow borrowers refinancing during Chapter 13 Bankruptcy repayment plan. Chapter 13 Bankruptcy can be active and must not be discharged.

VA and FHA refinancing during Chapter Bankruptcy mortgage guidelines are manual underwrites. The manual underwriting guidelines on VA and FHA loans are similar. However, HUD requires a 24 month timely payments on all debt payments reporting on credit reports. VA requires a 12 months timely payment requirement.

All FHA or VA loans during Chapter 13 Bankruptcy Repayment Plan need manual underwriting. The housing market is booming. Home values have skyrocketed double in the past several years, and many homeowners are sitting on substantial equity. The following paragraphs will cover refinancing during Chapter 13 Bankruptcy repayment plan.

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What do You Mean by Refinancing?

Replacing an existing loan with a new one is known as refinancing. A new loan typically comes with different terms, such as interest rates, repayment periods, or monthly payments. Replacing an existing loan with a new one is what refinancing entails. The new loan usually has different terms, such as interest rates, repayment periods, or monthly payments. This can involve obtaining a new loan from the same lender or a different one to pay off the original loan.

Individuals frequently opt for refinancing to benefit from reduced interest rates, lower monthly payments, modify the loan term, or utilize the equity in an asset like a home. Individuals commonly opt for refinancing to benefit from reduced interest rates, lower their monthly payments, modify the duration of the loan, or leverage the equity in a valuable asset such as a house.

Refinancing can apply to various types of loans, including mortgages, auto loans, student loans, and personal loans. It’s a financial strategy aimed at improving the terms or overall cost of borrowing.

Can You Refinance During Bankruptcies?

Seeking guidance from a bankruptcy attorney is essential to ensure compliance with legal obligations, assess available options, and understand the implications of refinancing within the context of bankruptcy proceedings.

Refinancing during bankruptcy is a complex process that requires careful assessment of individual financial situations and adherence to legal requirements.

For individuals in Chapter 7 bankruptcy, finding lenders willing to refinance can be challenging due to the discharge of debts that severely impact creditworthiness. However, those in Chapter 13 bankruptcy, where a structured repayment plan is in place, may have more options. Court approval may be necessary, and lenders will carefully examine the applicant’s ability to afford the new loan payments.

Ultimately, people filing for bankruptcy should carefully consider how refinancing may affect their financial situation and seek expert guidance to make informed decisions.

What’s the Difference Between Chapter 7 and Chapter 13?

Chapter 7 bankruptcy, known as “liquidation,” involves selling nonexempt assets to pay off debts quickly. It’s suitable for individuals or businesses with limited ability to repay debts. Most unsecured debts are discharged but stay on the credit report for up to ten years.

Chapter 13 bankruptcy, known as “reorganization,” entails creating a repayment plan over three to five years. Debtors with regular income can keep assets like homes or cars while paying off debts. Once the plan is completed, remaining eligible debts are usually discharged. Chapter 13 stays on the credit report for up to seven years.

Chapter 7 involves asset liquidation for quick debt relief, while Chapter 13 allows for a structured repayment plan to retain assets over time. The choice depends on factors like income, assets, and financial goals.

Buy Out Chapter 13 By Refinancing During Chapter 13 Bankruptcy

It is possible to do a cash-out FHA and VA loan during the Chapter 13 Bankruptcy repayment plan. There is no waiting period after the Chapter 13 Bankruptcy discharge date on VA and FHA loans. Any Chapter 13 Bankruptcy discharge not seasoned for two years must be a manual underwrite. Many homeowners can do a cash-out refinance and pay off the Chapter 13 Bankruptcy outstanding balance with the proceeds.

Many homeowners with equity in their homes can tap into their home equity and do a cash-out refinance mortgage loan for a Chapter 13 Bankruptcy buyout to buyout the Chapter 13 repayment plan early.

It is possible refinancing during Chapter 13 Bankruptcy repayment plan during your mortgage while in an active Chapter 13 bankruptcy. There is no law governing this. Finding a willing lender is entirely up to the individual(s). Under HUD guidelines, borrowers are eligible to qualify for an FHA Loan one year into a Chapter 13 Bankruptcy Repayment Period. However, many lenders have overlays.

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Can You Refinance Your Mortgage While In Chapter 13?

Homeowners can refinance their mortgage while in a Chapter 13 Bankruptcy repayment plan. But not all lenders will accept borrowers while in Chapter 13 Bankruptcy. Not all lenders have the same lending requirements on FHA loans. Lenders can have mortgage overlays.

Lender Overlays mean they do not have to honor HUD Guidelines qualifying for an FHA Loan during a Chapter 13 Bankruptcy. Some lenders will not allow borrowers to qualify for an FHA Loan until two years after a Chapter 13 Bankruptcy discharge date due to lender overlays. Every lender has their own lender overlays. No two lender has the same overlays.

Generally, lenders want to see one year of timely mortgage payments before considering a refinance. Similarly, lenders often offer loan modifications to individuals while in a Chapter 13 bankruptcy. In some circumstances, filing for relief under the bankruptcy code helps individuals obtain a loan modification due to decreased monthly expenses. Thereby allowing them to meet the lender’s debt-to-income requirements.

Difference Between Loan Modification Versus Refinancing During Chapter 13 Bankruptcy

People often get loan modifications while in bankruptcy. As I previously stated, filing bankruptcy usually frees up some of your income and might make getting a loan modification more feasible. Sometimes lenders will require court approval before entering into a loan modification.

However, at least in the jurisdiction where I practice, this is not necessary. Many judges will deny any motion brought to approve a loan modification as unnecessary. However, most judges recognize that lenders want court approval, so they do not run afoul of the automatic stay and will usually grant such motions.

Can Mortgage Payment Change While In A Chapter 13 Bankruptcy?

Yes, but only within the terms of your original mortgage. If you had an adjustable-rate mortgage when you filed for bankruptcy, then the mortgage rate can change according to the terms of your mortgage. Conversely, if an individual had a fixed-rate mortgage before filing for bankruptcy, their mortgage would be locked in at such a rate.

Waiting Period After Filing on Refinancing During Chapter 13 Bankruptcy

The bankruptcy filing will have no bearing on the terms of your mortgage. When you are in an active Chapter 13 bankruptcy and your mortgage payment changes due to an adjustment in your interest rate or escrow payment, your lender will generally send you a “Notice of Mortgage Payment Change.”

This is just a notice of your new payment amount. It will usually explain why there is an adjustment. Remember that even though you may have a fixed interest rate if your real estate taxes are paid through your mortgage and your taxes increase. This will result in increased mortgage payments, just like if you were not bankrupt.

Cash-Out Refinancing During Chapter 13 Bankruptcy

VA and HUD Guidelines for qualifying for an FHA loan during and after Chapter 13 Bankruptcy are the same. VA  and FHA loans are the only two mortgage loan programs that allow manual underwriting. VA and FHA loans are The only loan programs that allow refinancing during Chapter 13 Bankruptcy.

Borrowers can qualify for a VA and FHA loan during Chapter 13 Bankruptcy one year into the Chapter 13 Bankruptcy repayment plan. 12 months of payments need to have been made to all of their creditors.

No late payments to creditors from the time they started their repayment plan. Verification of Rent is required. Minimum of 580 credit scores for 3.5% down payment home purchase loans. All Chapter 13 Bankruptcy during or after mortgage files are manual underwriting. There is no waiting period to qualify for an FHA after a discharge date of a Chapter 13 Bankruptcy. Underwriters will want to see that all payments to creditors have been made on time during their Chapter 13 Bankruptcy repayment period.

When Can I Apply For an FHA After Filing Chapter 13 Bankruptcy

Not all lenders will do manual underwriting. FHA and VA loans are the only two home mortgage program that will allow manual underwriting during the Chapter 13 Bankruptcy repayment period. Chapter 13 Bankruptcy does not have to be discharged.

Borrowers can qualify for a VA or FHA loan one year after filing Chapter 13 Bankruptcy if they have made 12 timely payments on their repayment plan to the bankruptcy trustee. Trustee approval is required. There is no waiting period after the Chapter 13 Bankruptcy discharge date on FHA and VA loans.

However, if the Chapter 13 Bankruptcy has not been discharged for two years, it must be manually underwritten. VA and FHA loans are the only mortgage programs allowing manual underwriting.

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Manual Underwriting Guidelines on Refinancing During Chapter 13 Bankruptcy

If the Chapter 13 bankruptcy was not seasoned for two years after the Chapter 13 bankruptcy discharge date, the file must be manually underwritten. A large percentage of our files at Gustan Cho Associates are manually underwritten. We are experts in originating manually underwritten FHA and VA loans.

Gustan Cho Associates has no overlays on government and conventional loans. Borrowers can also do a cash-out refinance during the Chapter 13 Bankruptcy repayment plan. Borrowers can also refinance cash-out after the Chapter 13 Bankruptcy discharge date with no waiting period.

Refinancing During Chapter 13 Bankruptcy Repayment FAQ

1. Can You Refinance During Bankruptcies? Refinancing during bankruptcy, specifically Chapter 13, is possible but intricate. FHA and VA loans are the only mortgage programs permitting refinancing during Chapter 13 bankruptcy repayment plans. While Chapter 7 bankruptcy discharge severely impacts creditworthiness, Chapter 13 bankruptcy offers more options due to the structured repayment plan.

2. What’s the Difference Between Chapter 7 and Chapter 13? Chapter 7 involves quick debt relief through asset liquidation, whereas Chapter 13 allows for a structured repayment plan to retain assets over time. Debtors with regular income can opt for Chapter 13, keeping assets like homes or cars while paying off debts.

3. Can Mortgage Payment Change During Chapter 13 Bankruptcy? Yes, mortgage payments can change within the original mortgage terms during Chapter 13 bankruptcy. Adjustable-rate mortgages may fluctuate based on terms, while fixed-rate mortgages remain unchanged.

4. Cash-Out Refinancing During Chapter 13 Bankruptcy. FHA and VA loans are the only programs allowing manual underwriting during Chapter 13 bankruptcy. Borrowers can qualify one year into the repayment plan, provided timely payments to creditors have been made. Manual underwriting is necessary if bankruptcy hasn’t been discharged for two years after filing.

5. When Can I Apply For an FHA After Filing Chapter 13 Bankruptcy? Borrowers can qualify for FHA loans one year after filing Chapter 13 bankruptcy, given trustee approval and timely payments to creditors. No waiting period is required after the discharge date, but manual underwriting is necessary if bankruptcy hasn’t been discharged for two years.

6. Manual Underwriting Guidelines on Refinancing During Chapter 13 Bankruptcy. Files must be manually underwritten if Chapter 13 bankruptcy isn’t seasoned for two years after discharge. Borrowers can also consider cash-out refinancing during the repayment plan or after discharge with no waiting period.

This blog on refinancing during Chapter 13 Bankruptcy was updated on March 14, 2024.

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