I Did Not Reaffirm My Mortgage—Can I Refinance?

When a homeowner files for bankruptcy, they face various decisions regarding their debts, including their mortgage. One decision involves whether to reaffirm a mortgage, an agreement that reinstates personal liability for the debt after bankruptcy discharge. Choosing not to reaffirm a mortgage is common, meaning the homeowner is no longer legally obligated to make payments on that specific debt, though they typically continue to do so to retain their property. This situation often leads to questions about future financial actions, particularly whether refinancing the mortgage remains an option.

Understanding Mortgage Non-Reaffirmation

Mortgage reaffirmation is a voluntary agreement between a debtor and a mortgage lender, filed with the bankruptcy court, to make a debt legally enforceable again after bankruptcy. Without reaffirmation, a lender cannot pursue a deficiency judgment against the borrower if the property’s sale after foreclosure does not cover the outstanding loan balance.

When a mortgage is not reaffirmed, the borrower’s personal obligation to repay the debt is legally discharged through the bankruptcy process. However, the lender’s lien on the property remains intact, securing their interest in the home.

The lien gives the lender the right to foreclose on the property if the borrower stops making payments, even without personal liability. Therefore, while the borrower is no longer legally bound to pay, they typically continue to make payments to avoid foreclosure and retain ownership of their home.

Refinancing After Non-Reaffirmation

Refinancing a mortgage after it was not reaffirmed during bankruptcy is often possible, though it involves specific considerations from a lender’s perspective. The discharge of personal liability means the original promise to pay is legally nullified. Despite this, lenders evaluating a refinance application primarily focus on the borrower’s current ability and demonstrated willingness to make future payments.

Lenders tend to assess the risk based on the borrower’s payment behavior since the bankruptcy discharge. A history of consistent, on-time payments on the non-reaffirmed mortgage demonstrates financial responsibility. This “paying as agreed” behavior, even without a legal obligation to do so, signals a reliable borrower.

The absence of personal liability on the original mortgage does not automatically disqualify a borrower from obtaining new financing. Lenders will look for a sustained period of timely payments on the existing mortgage. The willingness to maintain payments on a debt from which personal liability has been removed can be viewed favorably, indicating a strong commitment to homeownership.

Factors Affecting Refinance Approval

Several factors influence the approval of a refinance application after a mortgage has not been reaffirmed in bankruptcy. Rebuilding a positive credit history post-bankruptcy is an important element lenders consider. They will scrutinize payment records on the non-reaffirmed mortgage and any other credit accounts opened since the bankruptcy discharge, looking for at least 12 to 24 months of consistent, on-time payments.

Waiting periods are also an important consideration, varying by loan type and the specific bankruptcy chapter filed. For conventional loans, borrowers typically face a waiting period of two to four years after a Chapter 7 discharge or two years after a Chapter 13 discharge, provided payments were made as agreed. Government-backed loans, such as those from the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), generally have shorter waiting periods, often two years after a Chapter 7 discharge or one year into a Chapter 13 repayment plan with court approval.

A borrower’s debt-to-income (DTI) ratio is another important metric, calculated by dividing total monthly debt payments by gross monthly income. Lenders generally prefer DTI ratios below 43% to 50%, as a lower ratio indicates greater financial capacity to handle new mortgage payments. The loan-to-value (LTV) ratio, which compares the loan amount to the home’s appraised value, also impacts approval, with lower LTVs (meaning more equity) indicating less risk for the lender.

Lenders also require stable income and employment history to ensure the borrower can consistently make mortgage payments. Documentation such as pay stubs, W-2 forms, and tax returns for the past two years are commonly requested to verify income. A steady employment history, generally two years in the same field, provides further assurance of financial stability.

Finding and Applying for a Refinance

Identifying the right lender is a proactive step when seeking to refinance a non-reaffirmed mortgage. It is beneficial to seek out lenders who have experience working with borrowers who have undergone bankruptcy, particularly those offering government-backed programs like FHA or VA loans, as these programs often have more flexible guidelines. Some conventional lenders and credit unions also specialize in post-bankruptcy financing and may be more understanding of unique financial situations.

Gathering all necessary documentation before applying can streamline the refinance process. This typically includes:

• The bankruptcy discharge order, along with any confirmed Chapter 13 repayment plans if applicable.
• Proof of income, such as recent pay stubs, W-2 forms from the past two years, and tax returns, or profit and loss statements for self-employed individuals.
• Recent bank statements, usually for the last two to three months, to verify assets and demonstrate a history of managing finances.
• Current mortgage statements for the non-reaffirmed loan, as they provide evidence of consistent and timely payments.
• Property details, like the deed, property tax statements, and homeowners insurance policy.

During the application process, it is important to be transparent with potential lenders about the bankruptcy history and the decision not to reaffirm the mortgage. Clearly explaining the consistent payment history on the existing mortgage can help build a lender’s confidence in your financial commitment. The process generally involves an initial inquiry, pre-qualification, formal application submission, underwriting, and finally, the appraisal and closing.