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Home Refinancing After Bankruptcy

Many people struggle with credit after bankruptcy. With the current credit crunch, its even more difficult to find a mortgage lender who will approve your for home refinancing. It's important to re-establish credit after any sort of financial difficulty, especially after a bankruptcy. Filing for bankruptcy damages credit scores and remains on an individual's credit report for up to ten years. Lenders are often reluctant to extend credit to individuals who have filed, especially now. If you're in this situation, you're probably wondering how you can get credit in these times where it's hard for just about anyone to get credit. You may even be having a hard time paying your mortgage. But there is a way to refinance even with bad credit: FHA home loans.

FHA allows mortgage refinancing after 2 years for a chapter 7 bankruptcy, and FHA allows home refinancing while in a for a chapter 13 bankruptcy if borrowers have a perfect payment history with bankruptcy. You would need to show proof that your trustee payments and mortgage payments are current and that the payments were made on time for at least 12 months.

Conventional lenders won't allow you to refinance until your chapter bankruptcy is 3 years old, and they'll typically expect a loan to value (LTV) of 70% or less, which means you'll have to have at least 30% equity in your home. Even with all of that, you probably won't get approved for a conventional refinance loan due to declining home prices. This is why so many people who have recently purchased their homes are now upside down on their mortgages. The declining values have now made their home worth less than what they owe the lenders.

The other thing to consider is interest rates. If a conventional lender does approve you for a refinance, you'll end up paying a much higher interest rate than what you would pay with FHA. And, it will most likely be an adjustable rate mortgage (ARM), which changes depending on the prime index. This will make your mortgage harder to afford, which could expose you to foreclosure. With FHA, even with your bankruptcy, you could still get a low, fixed rate loan. This will make your payments more predictable and easier to budget each month.

FHA refinancing will help you re-establish credit. All it takes is to keep current and on time with your mortgage payments. Within two years, it will make an incredible difference on your credit scores, especially if you've re-established other forms of credit.

Establishing Other Forms of Credit
A great way to re-establish credit is to get a secured credit card, keep the balances low and make your payments on time each month. You can get approved for a secured credit card, even with a bankruptcy because it requires you to open a savings account that the card carrier holds as collateral. Whatever you deposit is your credit line.

To increase your credit line, deposit more money. It's perfect because you're saving money and you're rebuilding your credit at the same time. Keep the account open even after you get to the point where you can get an unsecured credit card, because closing it will lower your scores. You don't want to do anything to lower your scores while you're rebuilding your credit.

You can get a secured credit card shortly after your debts are discharged in a chapter 7 bankruptcy or within a few months of starting your chapter 13 trustee payments. You should get a secured credit card and make timely payments to it for several months before trying for a refinance. It will help increase your chances of approval.

Check Your Credit Reports and Dispute Inaccuracies
The other thing you should do after your debts are discharged is to get a copy of your credit report from the three credit bureaus: Experian, Equifax and TransUnion. You are entitled to a free report from each of these agencies through annualcreditreport.com. Once you get your credit reports, go through them. All the accounts that were discharged in your bankruptcy probably still have all the delinquent information, charge-offs and other derogatory information, which unnecessarily lowers your credit scores.

All you need to do to have your credit report updated to accurately reflect the status of these accounts is to write to each of the bureaus. Give them the account number and creditor name for each account and describe how they are inaccurate by telling them that the debts were discharged by your bankruptcy. Then, tell them that you want each account to properly reflect "included in bankruptcy". In addition to the letter, send the credit bureaus a copy of your full bankruptcy papers and the discharge notice. This proves to them that the accounts were discharged. Once the bureaus update your credit reports, your scores will go up by quite a bit. You should do this before shopping for a home refinance.

For more information and to get started with your FHA refinance, complete the free loan quote at the top of this page.