To help rebuild your financial life after bankruptcy, borrowing against some of your home’s value can be a tempting option. Home equity loans usually charge lower interest rates than personal loans or credit cards and allow you to take out larger sums. But bankruptcy’s damage to your credit score and lending history creates significant hurdles to qualifying for a new loan.
Whether you can secure a home equity loan after bankruptcy depends on your credit score, the amount of equity you hold in the property, how long ago you filed for bankruptcy and the type of bankruptcy you declared. Here’s how to increase your chances of getting approved.
In some cases, you can maintain ownership of your primary residence despite declaring bankruptcy. However, declaring bankruptcy will negatively impact your credit score and impose restrictions on when you can borrow, making it harder to meet a home equity lender’s requirements.
Having a bankruptcy on your credit file tells lenders you were unable to meet your debt obligations and needed serious debt relief. Unsurprisingly, credit rating agencies like FICO don’t look favorably on this, since they weigh your repayment history most heavily when determining your score — so much so that you could see your credit score fall by as much as 200 points, according to credit bureau Experian.
Those with higher scores before bankruptcy will see a much bigger drop than those with lower scores who may have already had blemishes on their credit record.
How long damaging bankruptcy information stays on your credit file will depend on which kind of bankruptcy you file. Chapter 7 remains on your report for 10 years from the filing date, while Chapter 13 lingers for seven. As your bankruptcy ages, it’ll impact your score less and less, especially if you’ve responsibly used credit since.
Keeping your home during bankruptcy
The type of bankruptcy you file for will determine the steps you’ll need to take to keep you home. How much home equity you can shield varies widely depending on the state you live in and its homestead exemption rules.
Chapter 7 bankruptcy: Also known as liquidation bankruptcy, you’ll sell your assets to pay off a portion of your debts. The remaining balance is eliminated when the bankruptcy is discharged, typically within a few months. You’ll need to pass a means test to use this option.If you file Chapter 7 and want to keep your home, you must be current on your mortgage payments and complete a bankruptcy exemption to shield all your home equity from creditors.
Chapter 13 bankruptcy: With Chapter 13 (also known as repayment bankruptcy), the debt is restructured around a three-to-five-year payment plan, so that monthly bills become more manageable and some or all of your debt gets cleared in that time. Any remaining balance will be canceled when the bankruptcy is discharged.
If you’re behind on your mortgage payments, you can include this in your three-to-five-year repayment plan and maintain home ownership. The repayment plan can also help protect any home equity that isn’t covered by a bankruptcy exemption.
How to get a home equity loan after bankruptcy
You won’t be able to tap the equity in your home immediately after filing for bankruptcy. Lenders generally require a waiting period of between one and five years from discharge or dismissal — and up to seven following foreclosure — before they’ll approve you for a home equity loan. This is because they want to be sure you’ve righted your finances and can manage new debt.
How long you’ll need to wait will depend on the type of bankruptcy filed, your mortgage and the kind of home equity loan you want. For example, you can get a cash-out refinance on an FHA or USDA loan after only a year if you prove extenuating circ*mstances with a Chapter 7 bankruptcy or make 12 on-time payments with a Chapter 13 bankruptcy.
Each lender will review your application on a case-by-case basis and judge it against their specific list of requirements when deciding whether to grant you a home equity loan. Many may hesitate to work with you too soon after bankruptcy.
To improve your odds of securing a loan, take these steps:
1. Work on improving your credit score
Many lenders won’t approve your application unless your credit score tops 620, though some may even refuse to work with borrowers whose scores sit below 680. To hit such targets post-bankruptcy, start by getting free copies of your credit reports from each of three credit bureaus (Experian, Equifax and TransUnion) at annualcreditreport.com. Review these for any errors that may have occurred relating to your bankruptcy or payment history. Any mistake could hurt your score, so dispute all credit report errors with the appropriate bureaus.
Next, prioritize paying all bills on time: Your payment history is the largest factor determining your score, accounting for 35% of your FICO score and 40% of your Vantage Score.
If you’ve closed many of your credit accounts when dealing with your debt and bankruptcy, you may need to open a new one to rebuild your payment history and show lenders you can responsibly manage money. A secured credit card, backed by a cash deposit, is the easiest way to do this when your credit score is low.
Check your credit score for free and receive personalized guidance on improving it with the LendingTree Spring app.
2. Decide on your loan product
You can tap into your home equity after bankruptcy in three ways: a cash-out refinance, a home equity loan or a home equity line of credit.
→Cash-out refinance: This option replaces your current mortgage with a new, larger one allowing you to receive the difference between the two home loans in cash. To qualify, you’ll need to have more than 20% equity in your home, a minimum credit score of 620 and a debt-to-income ratio of 43% or less. The cash-out refinance mortgage cannot exceed 80% of your home’s value. The interest rates offered tend to be lower than those on home equity loans and home equity lines of credit. In addition, cash-out refinances are typically easier to qualify for than home equity loans or home equity lines of credit, since they aren’t a second mortgage and are deemed less risky by lenders.
→Home equity loan: This is a second loan on your property secured by a portion of the equity you’ve built up in it. You’ll receive the loan funds as a lump sum and then pay it back on a fixed schedule with terms ranging from five to 30 years. With a home equity loan, you may be able to borrow up to 100% of the home’s value, though most lenders cap loans at 85%. To qualify you’ll need a credit score of at least 620 (though many lenders set the bar higher at 660 or 680) and a debt-to-income ratio of 43% or less. Expect to pay a higher interest rate than you might with a cash-out refinance.
→Home equity line of credit (HELOC): Functioning similarly to a credit card, a home equity line of credit lets you borrow up to 85% of the value of your home for a “draw” period, typically 10 years. Unlike with a cash-out refinance loan or a home equity loan, you can borrow, repay the balance and borrow again as often as you like. And when the draw period ends, you’ll only need to pay off the amount you’ve used, not the full credit line. Most lenders charge variable interest rates. To qualify for a HELOC, you must have a debt-to-income ratio of 43% or less and a credit score of 620 or better — although the best terms go to those with scores above 780.
3. Shop around
Each lender has its own rules and requirements when it comes to lending to someone with a past bankruptcy on their credit record and it may take a few tries to find one willing to work with you — especially if your credit score remains below 680.
It’s worth searching for a few different lenders who can provide you with the cash-out refinance, home equity loan or HELOC you want. That way, you can compare their rates, fees, maximum loan amounts and repayment terms to ensure you get the best deal possible. Applying to multiple lenders will have the same impact on your credit score as applying to just one, provided you do so within a 14-to-45-day window (the amount of time will depend on the scoring formula used).
4. Be candid about your circ*mstances
Lenders may look more favorably on your home equity loan application if you explain what caused you to file bankruptcy. Events like divorce, illness, high medical costs or job loss (events typically viewed as beyond the borrower’s control) tell the lender that extenuating circ*mstances were behind your financial problems rather than personal money mismanagement. You could also include details of any moves you’ve made since the bankruptcy to improve your credit and get your finances back on course.
| Pros | Cons |
|---|---|
| Low interest rates. Home equity loans typically charge less than personal loans or credit cards. | Foreclosure risk. You could lose your home if you default on payments. |
| Tax benefit. If you use your loan to make home improvements, you can deduct the interest on your taxes. | Loss of equity. Your total debt will increase and you could owe more than the home’s worth if property prices drop. |
| Flexibility. Funds can be used for any purpose. | Closing costs. You’ll pay between 2% and 5% of the loan amount in fees. |
