refinance

Rules for refinancing after bankruptcy

Don TaylorQuestionDear Dr. Don,
We currently have a 30-year conventional mortgage at 7 percent, with a loan balance of $192,000. We have never, ever, missed or been late on a mortgage payment.

What are the rules regarding refinancing after a Chapter 7 bankruptcy when it has been two full years since the bankruptcy was discharged? What kind of interest rate could we get for a traditional conventional loan vs. FHA for a 15-year fixed rate loan with credit scores of 720 and 665? We would not require any cash out and other than our mortgage, we are debt free.
-- Meg Mortgages

AnswerDear Meg,
Fannie Mae and Freddie Mac require four years from either the dismissal date or the discharge date for a Chapter 7 bankruptcy, so getting approved for a conventional loan just two years out isn't in the cards. The Federal Housing Administration discusses its underwriting standard in a FAQ on its website:

Question
How does a bankruptcy affect a borrower's eligibility for an FHA mortgage?

Answer
A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations. The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.

Additionally, the lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to recur.

Your credit scores meet the standards for FHA refinancing. These standards were recently updated in "Mortgagee Letter 10-29," which states: "Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing."

Since you're not looking for cash-out at closing, you should qualify for FHA streamlined refinancing. The Department of Housing and Urban Development Web page "Streamline Your FHA Mortgage" discusses this loan program.

Bankrate doesn't report FHA loan rates, but you can use Bankrate's weekly averages for national mortgage rates to evaluate the rate you're offered on your FHA mortgage.

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