While many people may believe otherwise, borrowers who have filed for bankruptcy are not entirely disqualified from receiving a home equity loan. Quite the opposite, taking out a home equity loan after bankruptcy is one of the most sensible decisions to make in recovering from a bankruptcy. During the real estate boom during the early 2000’s, home equity loans became immensely popular due to their low interest rates and more responsive payment terms. For borrowers managing more than one loan, home equity loans allowed them to acquire funds at a low interest rate and pay off high-interest loans, consolidating debt to a single, low interest loan. Even under current market conditions, home equity loans conveniently provide the means to consolidate a borrower’s debt while repairing the damage of a bankruptcy.
What is a home equity loan?
A home equity loan is a type of loan in which the borrower elects to utilize equity accumulated on a property as collateral in order to receive funds. Home equity is the sum total of (a) the down payment and monthly payments made toward the principle mortgage balance on a home loan and (b) the amount that the property has appreciated in value during that period. Essentially, equity comprises the share of your property that accumulated, either through annual or monthly payments, in addition to any increase in value from the original sell price. Through a home equity loan, borrowers can cash in the equity which they have accrued in their home as a second mortgage.
How will a home equity loan help me recover from bankruptcy?
Borrowers utilize home equity loans for a variety of reasons, one of the most common being to recover from a bankruptcy or other credit-damaging event. In general, the available interest rates through home equity loans are lower than rates secured through other types of loans, providing borrowers with easy access to equity funds with minimal added expense. As such, many homeowners who have not undergone a bankruptcy will secure home equity loans to take advantage of the beneficial rates in order to apply toward debt financing, whether for a child’s education or to fund home renovation.
Why a home equity loan?
Unlike consumer loans such as auto loans, boat loans, credit card debt, or student loans, the interest which a borrower pays on a home equity loan is tax-deductible, providing a substantial tax advantage that essentially reduces the already competitive interest rates from the loan. In addition, home equity loans are flexible and offer borrowers the option of choosing between a fixed or adjustable rate, allowing borrowers to customize their loan to fit their unique circumstances.
Steps to Acquire a Home Equity Loan Following Bankruptcy
- Collect documentation. Before discussing your options with a lender, you should gather up your paperwork, especially any documentation which proves that you have made on time payments since filing for bankruptcy. This may include current credit card statements, auto loan monthly statements, or utility bills, all of which should illustrate a consistently on-time payment record.
- Check your credit. Before applying for a home equity loan, obtain a copy of your credit report, and determine your credit standing. Ensure that all debts on your credit history are accurately reported, and repair and discrepancies that you may find for a small credit boost. When all bankruptcy debts are soundly displayed, your debt-to-income ratio will be reduced.
- Establish decent credit. In order to secure the most advantageous rates for your home equity loan, you should repair or re-establish your credit prior to applying, using a credit card or a secure credit card. In addition, use credit cards infrequently and never exceed 30% of any one credit card’s maximum spending limit. Remember, successfully managing your credit will save you a bundle when shopping for interest rates.
- Determine your equity. To determine how much equity you own on your property, you will need to arrange for an appraisal, which is a professional estimate of your home’s value. With this information, you will know how much you are eligible to borrow; minus a few thousand dollars for the cost of closing the loan, the amount you can borrow is dependent on your equity.
- Find a Lender. Get several home equity loan quotes from different lenders and remember to disclose your past bankruptcy. The majority of lenders will issue home equity loans to borrowers with bankruptcies which are at least 18 months to 2 years old. Lenders can offer tremendous help to borrowers after a bankruptcy during loan application.
- Submit your documents. Once you have found a lender with the optimal loan offer who is willing to fund the loan despite your bankruptcy, send in your copies of the financial documentation. With this paperwork, your lender will assess your current financial standing to determine whether or not you have made improvements since the bankruptcy; as a result, approval for a loan after bankruptcy, regardless of the loan program, depends on proving your reliability as a borrower.
- Finish verification. After you have submitted your paperwork, your lender may require you to fill out some additional forms. In addition, the lender will evaluate your gross monthly income, and you may need to provide copies of your latest two paychecks, most recent federal income tax return form, and statements of the funds within your savings and checking account.
- Close the loan. Following the verification process, the final step is to close the loan by signing the closing documents which legitimize your home equity loan. Moreover, during closing you will need to pay the closing costs for the loan and any additional required fees.
Mason-McDuffie Mortgage Corporation
Bon Air, VA
American Finance Group
Equity Mortgage Lending
Owings Mills, MD