This column is written for those contemplating a Chapter 13 bankruptcy as well as for those currently in Chapter 13. A mortgage refinance, while in a Chapter 13 bankruptcy, is quite a complicated financial and legal transaction. To do this requires a highly specialized mortgage banker experienced with both FHA lending rules and Chapter 13 bankruptcy court local rules. Such an individual must know how the Chapter 13 Trustee in your Federal Bankruptcy District approves this process. Another key component is the reputation of the mortgage lender with your attorney.
Now is, without a doubt, the best time in over sixty years to purchase a home or refinance a home loan. As this is written fixed rate 30 year mortgages are in the early 4% range. For those with an Adjustable Rate, Option ARM or, Balloon Mortgage this is absolutely the time to refinance. For those in bankruptcy this is going to take planning and action prior to refinancing. This is not a run of the mill refinance and not every mortgage lender is qualified to do this complex transaction.
I met with a couple recently who have an Option ARM based on the LIBOR index (scroll past the advertising to 1 Year LIBOR). While their rate today is slightly under 3% it will be 11.90% when rates return to normal market levels. In their situation, they can refinance their 1st mortgage and keep the payment within a range that will pass the Trustee smell test. This is a winning situation all around. They get to keep their home with a fixed, predictable monthly payment and the Plan continues to be paid until the Discharge enters at the end of the Chapter 13 Plan.
Preliminary Requirements: 1) Twelve months current mortgage and Chapter 13 Payments with no 30 day late payments. 2) Two years IRS Returns showing your income is sufficient to pay the mortgage, your Chapter 13 payment and any debt not included in the bankruptcy. 3) Minimum middle FICO Score of 680 [most will need to practice what I’ve previously posted as FICO 101a, 101b and 101c for several months prior to getting approval – begin improving your FICOs as soon as your Chapter 13 Plan is Court Approved]. 4) The maximum no-cash out loan to value on an FHA appraisal is presently 95%. Last, there is more but this is the essence of refinancing while in Chapter 13. Please contact me for additional details.
Financially Speaking, James Spray, CCMB, CNE – November 1, 2010
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