Newsletter: Can I get a new home loan after a forbearance or bankruptcy?
Good morning. I’m L.A. Times Business reporter Andrew Khouri, filling in for Rachel Schnalzer to bring you our weekly newsletter.
Mortgage rates have plunged during the COVID-19 pandemic to historical lows, spurring a wave of home refinancing and purchases among people eager to lock in for 30 years an interest rate below 3%.
At the same time, there has been considerable economic pain. Struggling homeowners have signed up for forbearance programs that allow them to delay mortgage payments. And although there hasn’t yet been a flood of bankruptcies, as some experts expect, that could change.
Refinancing can free up needed money for those facing financial constraints or hardship. And many may eventually need or want to sell their home and buy another. But can you get a new loan if you’ve been in forbearance or declared bankruptcy?
It is possible. You’ll have to qualify like anyone else, of course, and you’re likely to face additional requirements. Here is what you should know.
If I entered a forbearance program, can I still refinance my loan or get a loan to buy another house?
Yes, but there are restrictions, and those rules are based on the type of new loan you are getting, not your current loan.
If you want to use an FHA-, Fannie Mae- or Freddie Mac-backed loan — the majority of the marketplace — you can do so right away if you signed up for a forbearance program but continued to make your payments.
If you have missed payments, you will have to get back on track before refinancing or getting a new purchase loan.
How long will I have to wait?
For Fannie Mae- or Freddie Mac-backed loans, often referred to as “conforming” loans, if you missed payments but upon exiting forbearance paid everything back in a lump sum, then you don’t have to wait.
However, if you didn’t pay everything back upon exiting, you will need to make three consecutive payments under your repayment plan, payment deferral option or loan modification, according to the Federal Housing Finance Agency, which regulates the two government-controlled mortgage giants.
For FHA loans, there is a wait period if you’ve missed any payment in forbearance, even if you paid everything back in a lump sum, according to the Department of Housing and Urban Development, which oversees FHA.
The wait times will vary based on what kind of loan you are getting. For a cash-out refi, for example, you have to exit 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 purchase, but waiting periods are longer than they would be if you were just in forbearance. Like with forbearances, the rules are based on the new loan.
For Fannie Mae- and Freddie Mac-backed loans, the time frames are as follows:
◆ For Chapter 7 bankruptcies, you generally need to wait four years from the discharge or dismissal of your bankruptcy. The wait period could be only two years if what led to your bankruptcy was a one-time event out of your control, such as 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 dismissal date. As with Chapter 7, the wait period could be two years after the dismissal date if what led to the bankruptcy was a one-time event beyond your control.
For FHA-backed loans, the time frames are as follows:
◆ For Chapter 7 bankruptcies, the wait period is generally two years after discharge, but could be one year if the bankruptcy was caused by events outside your control. There is no wait period after a dismissal.
◆ For Chapter 13 bankruptcies, you could qualify after being in the repayment period for a year, as long as the bankruptcy administrator approves.
What if I want a loan not backed by the federal government?
For both forbearance and bankruptcy, there aren’t any set rules, and restrictions vary.
Jeff Lazerson, a mortgage broker in Laguna Niguel, said some lenders have wait periods that are the same or stricter than Fannie Mae’s or Freddie Mac’s.
Others don’t have hard-and-fast rules on wait times.
“It’s not so much a black-and-white issue,” he said. Instead, “they want to know a little bit more about what happened,” and they ask you to document it.
For example, if your businesses went under because of the pandemic, Lazerson said, “those are the kind of things that resonate with lenders — that you are a responsible person and just fell into some bad luck.”
A small number of lenders will even originate loans to people “one day out of bankruptcy,” Lazerson said, but will probably require large down payments and a high interest rate.
“There is a price tied to that,” he said.
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