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Chapter 12 Bankruptcy
I have a couple who want a cash-out refinance loan on an owner-occupied property that is completely paid off. However, they have a Chapter 12 bankruptcy that was discharged a little over a year ago. Has anyone else experienced this situation and have advice on potential options for them? Thanks!
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3 Replies
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Just got off the phone with Gustan concerning this case scenario. The situation is quite interesting but also a little complicated. There is no waiting period after Chapters 11, 12, or 13 of bankruptcy; we can take it through manual underwriting. Let’s break it down and see what our options are:
Chapter 12 Bankruptcy:
This is for family farmers or fishermen with regular annual income.
A one-year discharge is significant because many lenders have waiting periods after bankruptcy.
Cash-out Refinance on Paid-off Property:
This can be great because there is a lot of equity to work with.
However, the recent bankruptcy may need to be fixed.
Conventional Loans:
Typically, conventional lenders require a 2-4 year wait after Chapter 12 discharge.
Some will do 12 months if there are extenuating circumstances.
FHA Loans:
FHA usually requires 12 months after Chapter 12 discharge.
It might be worth looking into this if they meet other FHA requirements.
VA Loans (if applicable):
VA loans usually have more lenient bankruptcy guidelines if either borrower is a veteran.
Some VA lenders might approve after 12 months of discharge.
Non-QM (Non-Qualified Mortgage) Lenders:
These lenders often have less strict criteria for bankruptcies.
You may pay more interest, but it’s an option when conventional routes are closed off.
Hard Money Lenders:
Hard money lenders could be a last resort for the loan.
Interest rates will be high, and terms will be less favorable.
Local Credit Unions:
Certain credit unions have greater lending flexibility and take a more holistic approach to their situation.
Portfolio Lenders:
Banks that keep loans on their books may be more willing to work with unique situations
Advice moving forward:
Get all documents related to the bankruptcy and its discharge.
Write out what happened leading up to the bankruptcy & how things have changed.
Check their credit scores – if they’ve rebuilt their credit since the bankruptcy, it could help their case.
Consider finding a mortgage broker who has experience with post-bankruptcy lending.
Remember that interest rates may be higher or terms less favorable due to the recent bankruptcy.
If they can’t get financing now, wait a few more months to open the potential lender pool.
Why were they taking cash out? If it’s for something specific, there may be other options.
Remember, each lender has specific criteria, so it pays to shop around. The fact that the property is fully paid off is a big positive that might make some lenders willing to work with it despite the recent bankruptcy.
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Dealing with a Chapter 12 bankruptcy, discharged over a year ago, and hoping to do a cash-out refinance on an owner-occupied property can be difficult, but there are some possibilities. Here are several routes that could be worth pursuing:
Chapter 12 Bankruptcy Primer
If you need to know what it is, Chapter 12 bankruptcy is for family farmers and fishermen to help them restructure their debts. Since it’s been discharged for over one year, this couple might have chances of refinancing; however, they must meet certain requirements.
Cash-Out Refinancing Options
FHA Loans
Seasoning Period: FHA guidelines typically require two years after discharge before allowing refinancing on these terms. However, exceptions will be made if borrowers can show “extenuating circumstances” in writing, signed under penalty of perjury.
Credit Requirements: Borrowers should expect lenders to demand minimum FICO scores above 580, although higher marks would generally improve their chances.
Loan-to-Value (LTV) Ratio: Under FHA’s standard program, up to 80% LTV is allowed for cash-out refinances.
VA Loans
Seasoning Period: VA lenders require a two-year post-discharge waiting period for most loan types, including IRRRLs (Interest Rate Reduction Refinance Loans).
Eligibility: Couples must still be eligible veterans or current military members during application processing.
LTV Ratio: Cash-out refinances allow LTV ratios up to 90% through VA’s programs.
Conventional Loans
Seasoning Period: Fannie Mae and Freddie Mac usually require a four-year waiting period after discharge. However, if extenuating circumstances can be documented, this may be reduced to two years.
Credit Requirements: The minimum credit score is between 620 and 640, depending upon the lender’s guidelines, which also consider other factors such as income level, etcetera.
LTV Ratio: Typically financed up to 80% of appraised value for cash-out refinance conventional loans.
Non-QM (Non-Qualified Mortgage) Loans
Flexible Underwriting: A recent bankruptcy discharge is not an automatic disqualification for all Non-QM loan programs. However, borrowers must still demonstrate the ability to repay the loan and meet other underwriting guidelines.
Credit and Income Requirements: Some lenders may require higher interest rates, larger down payments, or more equity reserves; however, these conditions could vary depending on the overall creditworthiness of the borrower(s).
LTV Ratio: Each individual lender offering non-QM loan programs may consider an LTV ratio of up to 80% on a case-by-case basis.
Steps To Take
Fix Credit Score: Pay off debt faster and rectify any mistakes in their credit report, which will result in better FICO scores that will help them qualify for more affordable home loans with lower rates, etcetera.
Record Income & Assets: Document stable income and sufficient assets – this can include savings accounts or investments such as stocks, bonds, mutual funds, etcetera which are readily convertible into cash within 30 days without penalties being imposed against holder(s).
Shop Multiple Lenders: Some non-QM lenders specialize in working with borrowers who have experienced recent bankruptcy discharges, so it would be wise to talk to several firms.
Consider Mortgage Brokerage Services: Utilize services offered by mortgage brokers who can compare loans among various lenders based on your specific needs, thus saving time, energy, etc., while securing the best possible refinancing deal given the couple’s unique circumstances.
Other Factors For Consideration
Interest Rates & Terms: The recent bankruptcy will impact interest rates. Therefore, they should expect higher rates than current market trends indicate being available unless drastic improvements occur quickly before finalizing terms sheets from competing lending institution(s).
Lender Requirements Vary Widely: Make sure you research around well enough until you find someone willing to work with you based on your current situation.
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Normally there’s a two year waiting period after Chapter 7 and Chapter 13 Bankruptcy with an automated underwriting system approval on FHA and VA Loans. There is no waiting period after Chapter 13 Bankruptcy discharge on VA and FHA loans as long as its manually underwriting. I am assuming there is no waiting period after Chapter 12 Bankruptcy discharge date as long as it is manually underwritten.