Home Equity Loan after Bankruptcy

By Stevie Duffin Updated on 7/24/2017

Borrowers who've filed for bankruptcy may not entirely be 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 bankruptcy. 

For borrowers managing more than one loan, home equity loans allow them to acquire funds with a low-interest rate to pay off high-interest loans. Home equity loans provide the means to consolidate a borrower’s debt while repairing the damage of 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 to receive funds. 

Home equity is the 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. 

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 sale 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 use home equity loans for many reasons, one of the most common reasons is to recover from bankruptcy or another credit-damaging event. 

In general, the interest rates on home equity loans are lower than rates secured through other types of loans. Even homeowners who have not undergone a bankruptcy can take advantage of the beneficial rates to apply for debt financing and apply it to other needs such a college tuition or 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 reduces the already competitive interest rates from the loan. 

Also, 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 documents. Before discussing your options with a lender, you should gather up your paperwork, especially any those that prove 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. See that debt on your credit history is accurately recorded. Also, 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 can be reduced.

• Establish decent credit. To secure the most advantageous rates for your home equity loan, you should repair or re-establish your credit before applying, using a credit card or a secured credit card. Also, 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 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.