Can I get a new home loan after forbearance or bankruptcy?
Hello. I’m LA Times Business reporter Andrew Khouri, replacing Rachel Schnalzer to bring you our weekly newsletter.
Mortgage rates plunged during COVID-19 pandemic to historically low levels, stimulating a wave of refinancing and real estate purchases for people who want to lock in an interest rate of less than 3% for 30 years.
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At the same time, there have been considerable economic difficulties. Homeowners in difficulty have signed up for abstention programs that allow them to delay mortgage payments. And while there hasn’t been a flood of bankruptcies yet, as some experts expect, that could change.
Refinancing can free up the money needed for those who are facing financial constraints or difficulties. And many may eventually need or want to sell their home and buy another. But can you get a new loan if you have forbidden or declared bankruptcy?
It’s possible. You will of course have to qualify like anyone else, and you will likely have to face additional requirements. Here is what you need to know.
If I signed up for a forbearance program, can I still refinance my loan or get a loan to buy another home?
Yes, but there are restrictions, and these rules are based on the type of new loan you get, not your current loan.
If you want to use a loan backed by the FHA, Fannie Mae, or Freddie Mac – the majority of the market – you can do so immediately if you’ve signed up for one. abstention program but continued to make your payments.
If you’ve missed payments, you’ll need to get back on track before you refinance or get a new loan to buy.
How long will I have to wait?
For Fannie Mae or Freddie Mac back-to-back loans, often referred to as “conforming” loans, if you missed payments but quitting forbearance paid it all off in a lump sum, you don’t have to wait.
However, if you haven’t paid everything off when you exit, you’ll need to make three consecutive payments as part of your repayment plan, deferral option, or loan modification, depending on the Federal Housing Finance Agency, which regulates the two government-controlled mortgage giants.
For FHA loans, there is a waiting period if you missed a forbearance payment, even if you paid everything back in a lump sum, according to the Department of Housing and Urban Development, which oversees the FHA.
Wait times vary depending on the type of loan you get. For a withdrawal refund, for example, you must quit forbearance and make at least 12 consecutive monthly payments. Other types of FHA loans have a shorter wait time.
What if I declared bankruptcy?
You can still refinance or buy, but the wait times are longer than they would be if you were simply forborne. As with abstentions, the rules are based on the new loan.
For loans guaranteed by Fannie Mae and Freddie Mac, the deadlines are as follows:
◆ For Chapter 7 bankruptcies, you generally have to wait four years from discharge or rejection of your bankruptcy. The waiting period could be just two years if what led to your bankruptcy was a one-time event beyond your control, like a giant medical bill or job loss.
◆ For Chapter 13 bankruptcies, the waiting period is two years from your discharge date or four years from the date of termination. As with Chapter 7, the waiting period could be two years after the termination date if what led to bankruptcy was a one-time event beyond your control.
For loans guaranteed by the FHA, the deadlines are as follows:
◆ For Chapter 7 bankruptcies, the waiting period is generally two years after discharge, but could be one year if the bankruptcy was caused by events beyond your control. There is no waiting period after dismissal.
◆ For Chapter 13 bankruptcies, you may be eligible after being within the repayment period for one year, provided the bankruptcy administrator approves it.
What if I want an unsecured loan from the federal government?
For both forbearance and bankruptcy, there are no set rules and the restrictions vary.
Jeff Lazerson, a mortgage broker at Laguna Niguel, said some lenders have the same or more stringent waiting periods than Fannie Mae or Freddie Mac.
Others do not have strict rules on wait times.
“It’s not so much a black and white question,” he said. Instead, “they want to know a little more about what happened” and they ask you to document it.
For example, if your businesses went bankrupt because of the pandemic, Mr Lazerson said, “These are the kinds of things that resonate with lenders – that you are a responsible person and have fallen into bad luck.”
A small number of lenders will even make loans to people “a day after bankruptcy,” Lazerson said, but will likely require large down payments and a high interest rate.
“There is a price attached to it,” he said.
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