Refinance After Bankruptcy and Late Payments?

Dear Bankruptcy Adviser, I'd like to know if it's possible to get a loan to refinance after three years out of bankruptcy and a few late payments on our home equity loan. Our credit score is in the low 600s. We are making our payments within the month it's due but have passed the grace period due to unexpected finance issues. We do want to work toward building up our reputation with the company now that we are on our feet ... please point me in the right direction. -- Brenda

Dear Brenda, I wish I could give you a purely optimistic opinion; one that you would want to hear. Unfortunately, you face a few big obstacles that will make refinancing difficult.

You are definitely eligible to apply for a refinance. Your bankruptcy case is closed, and you may have re-established some credit by now. Future lenders will want to see that you re-established some sort of credit post-bankruptcy. And while your credit score is important, post-filing good credit behavior can sometimes outweigh a low score.

There are two major obstacles you face: post-bankruptcy mortgage payments and home equity. Let's take a look at each.

Post-Bankruptcy Mortgage Payments

Lenders are going to be less-than-impressed with your post-bankruptcy late mortgage payments. To want to refinance, they need to see the applicant's stabilized financial situation since the bankruptcy ended. Late payments do not show stability.

In general, lenders want to see that you are current on your mortgage post-bankruptcy discharge and have no late payments for 12 consecutive months. Not just 12 mortgage payments, but 12 consecutive, on-time payments made by the due date or within the 15-day grace period. This shows financial stability and also better financial management.

Home equity

A new lender will not be willing to take on the debt when the house is significantly upside down. When you owe more than the property is worth, you are a very serious risk. That is because the lender knows that people are more likely to walk away from their home when no equity exists.

Since your current lender is already hoping you make your payment each month, a future lender is not going to take on that uncertainty unless you have quite a bit of equity in the house. I would say that anything less than a 40% equity cushion would be enough to disqualify you.

If you have late payments and little or no equity cushion, a loan application denial is highly likely.

You should pull your credit, see your current scores and then contact a mortgage professional in your area. That professional could review your credit scores, equity position and payment history all at once. He or she could tell you rather quickly that while you may not qualify now for a loan, there are things you can do to qualify in the future.

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