Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 8, 2012

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Homeowners who filed for bankruptcy can get a mortgage refinance loan. As with most loans, there are rules and exceptions for each borrower. These rules can vary based upon the borrower, lender, state, and other factors.

A home refinance loan is when a person takes out a new mortgage to cover the outstanding balance on a previous mortgage. It is generally done to shrink the loan’s interest rate, to reduce the monthly repayment amount, or to access cash against the property’s equity.

Main Types of Bankruptcy

One of the most important factors when deciding if a refinance loan will be approved is to determine what type of bankruptcy the person went through. The most common type is Chapter 7 Bankruptcy in which assets are sold to repay creditors. In this case, a borrower might lose their home as part of the process. A filing stays on a person’s credit report for 10 years.

Another main form is Chapter 13 Bankruptcy. Chapter 13 is a form of debt consolidation, and is supervised by a federal court. A filing stays on a person’s credit report for seven years.

Refinance Loan Options

After finishing the bankruptcy process, there are several refinance loan options to consider:

  • Conventional loans
  • FHA refinancing options
  • VA mortgage loans

Conventional loans are the most difficult to approve. If a bankruptcy was filed within 48 months of an applicant’s credit report, the loan will be denied. The four year time-frame is necessary before moving forward with the loan application.  

FHA lenders require at least one year for Chapter 13 filers to qualify. They must also provide documents of timely payments for a refinance loan.  For Chapter 7 filers, FHA Lenders require the bankruptcy be discharged for over two years.

VA Loans require similar standards as FHA loans, but there are a few differences. For Chapter 13 filers, applicants only need to show discharge, not proof of payment. For Chapter 7 filers, if the bankruptcy was discharged within two years, new credit must be obtained and proof must be shown to justify it.

Standard Proceedings

Although loan companies have differing standards for refinance borrowers, some factors remain standard. If the borrower has worked significantly to improve his or her credit score, that time frame can be reduced. One way to improve credit scores is to use a secured credit card and make timely payments. It is always important to request credit reports from all three agencies (Experian, TransUnion, and Equifax) to stay informed. Additionally, paying trustee payments and mortgage payments on time will benefit a home refinance loan application.

Regardless if a person has been through a bankruptcy, there are still several items to be wary of when applying for a home refinance loan. Since the loan is considered a new home loan, a majority of the same proceedings occur. This includes providing proof of income, labeling assets, and receiving a home appraisal. Additionally, borrowers should be aware of any extra charges, such as origination, inspection, and appraisal fees.

Just because there is an option to refinance a mortgage does not mean it is always the best policy. Sometimes it is better to continue paying for the original loan and not add or delete from the plan.