Q: My daughter and her ex-husband bought a house in 2000 with a variable loan. They were planning to refinance to a conventional loan, but never did.
They ended up filing for bankruptcy and were paying off what they owed on the house. They were divorced two years ago and she got the house. Her payments increased approximately $250 per month when the loan adjusted.
The bankruptcy was paid off and satisfied in October, 2009. Can she now get her house refinanced with a conventional loan and how should she go about it?
A: Conventional lenders today require borrowers who have had a bankruptcy to wait two to five years after the date the bankruptcy is discharged before being able to qualify for a loan.**
Since the housing and credit crisis, lenders have significantly tightened their credit standards. Your daughter will need credit of at least 580 to 620 just to qualify for an FHA loan. And, she will need “seasoning,” which is a nice way of saying she needs at least two to five years to allow her credit history and score to recover.
She should speak with a lender to get an idea of what she needs to do in order to get her finances into shape. But she should be prepared to continue to pay on this loan for some time to come.
Here’s another thought: With interest rates as low as they are today, your daughter should look at her loan documents and understand how her monthly payment is computed. If your daughter’s loan payments initially were set too low to pay off the amount that was actually owed on the loan, the amount she now sees may actually reflect what it takes to pay a mortgage – even at these low interest rates – on her house.
The interest rate on her loan may have come way down, but what she actually needs to pay for real estate taxes, insurance and the principal and interest payments on her loan may now be reflected in her new payment. It’s possible that no new loan will give your daughter a lower interest payment. If her loan recently adjusted and she didn’t obtain a loan that was targeted to people with bad credit, she should benefit from the current drop in short term interest rates.
When your daughter looks over her loan documents, she might want to have a conversation with a good and reputable mortgage lender to determine how her interest rate is set, how her monthly payment is computed and what her real estate taxes and insurance payments are on a monthly basis.
Once she understands that information, she will be in a better position to determine what to do going forward.