Refinancing Your Home After Chapter 13

Published Monday, July 13, 2009 @ 2:59 pm

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If you have declared under Chapter 13, you may be eager to refinance your home. In doing so, you should pay close attention to what the mortgage companies are proposing and whether you will actually benefit from refinancing.  It is a good idea to research companies offering refinancing during Chapter 13 and analyzing their track records with consumers. You can do this through debt advocacy organizations and state agencies that act as business watchdogs.

If you are finished with repayment under your Chapter 13 and have received your discharge, the refinancing process will resemble the process following a Chapter 7. You should work patiently to rebuild your credit with tried and true strategies and patience so you can get the best possible rate. It may pay off to take some time and slowly rebuild your credit before submitting any loan applications.

If you are still making payments under a Chapter 13 plan, refinancing a home is a bit more involved. First, there are three main categories of mortgage companies and financial services companies that will work to refinance homes for people still making payments under Chapter 13. The first kind of company works in the Chapter 13 process. The second type of company specializes in loans for “buying out” Chapter 13 bankruptcies. The way these buy-out specialists operate is by refinancing your current mortgage to pay the balance owed under your bankruptcy. The third kind of company operates by having your bankruptcy under Chapter 13 dismissed. Once that happens, the debt remaining is rolled into a new amount for a mortgage loan.

Generally speaking, all three types of company will require at least one year completed under the Chapter 13 plan, with only timely payments for all accounts. They will also take into account your financial situation at the moment, the amount of debt included in your bankruptcy, and the amount of equity available in the property. As a guideline, you should expect that a good company will only propose to buy out your Chapter 13 bankruptcy if your payment history has been good since the Chapter 13 repayment plan began, if the buyout will yield considerably lower monthly payments for you, and if you have at least 25% to 35% equity in your home.

It’s important to proceed carefully when seeking refinancing in the middle of a Chapter 13 bankruptcy. Make sure you know what the mortgage company is actually proposing to do; are they going to work around your Chapter 13 bankruptcy? Or will they be dissolving that bankruptcy? Do you understand what that will entail? Ask the mortgage company to spell out, in writing, how the refinance will work with your Chapter 13 plan- get it in writing.

Generally the companies will most closely scrutinize the 12 months prior to your refinance application to calculate your rate of interest. In order to get the best rates, try to wait until you have a good 12 month period where your mortgage payments are as current as possible. If your credit is not good enough to allow for favorable loan terms, wait some time and take steps to rebuild your credit. With a little time and effort, you can put yourself back in position to get a great refinance loan.

From: The Law Offices of John T. Orcutt. Call 1-800-899-1414 today to set up your free initial consultation.

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