Chapter 13 Mortgage Refi Tips

[flashoflight]

Instead of writing about all the things that went right and wrong with my refinance, I'll share some tips you won't hear from your BK lawyer.

1. If you are preparing for a chapter 13 FHA refi, you need 12 months ontime trustee payments and no post-petition lates. Late as far as the refi is defined as more than 29 days late on a trustee or credit card/loan payment. Being a few days late on the trustee payment doesn't matter but my BK lawyer doesn't recommend going beyond that without notifying him. Pre-petition baddies are fine. You also need to start rebuilding your credit with three new post-petition tradelines and do AZEO to maximize your 3-bureau mortgage scores. They take the middle score. Your other FICO scores don't matter.
2. FHA appraisals are a bit nit picky vs conventional. Not complete nitpicky. Mainly concerned about health&safety and functioning appliances, HVAC, and working plumbing with no leaks. Nothing should be in danger of falling over including fences and sheds.
3. You usually need one month's reserve. An IRA or 401k account will suffice with a balance letter. Hopefully you didn't drain your retirement to pay the credit cards. All banks and brokerages generate balance letters that mortgage lenders like.
4. You must pick a mortgage broker who handles chapter 13 FHA mortgages all the time every week. You don't want someone with no experience with the chapter 13 mortgage process.
5. Do not lock your rate early even in a rising rate environment. If it goes up, too bad. Locking your rate beyond the 45 or 60 days is not free. It costs points to extend a lock and there is a max limit on extensions which will put a lot of pressure on closing fast. Remember that the BK court process is very slow so we don't have the luxury to lock early like normal people. We have to notice the creditors and give them time to respond. Then your BK attorney needs to request the judge to sign off on it. We can't ask the judge to sign the refinance motion quicker. It may take a week or two or even more to sign an order. The court process is very capable of wasting four or five weeks instead of three weeks even with an uncontested motion to refi/incur debt. Your highly experienced ch 13 lawyer will know how long it typically takes for your particular judge to sign. After the judge signs the order, you can start thinking about locking your rate.
6. Your loan officer should be capable and willing to speak directly with the BK lawyer to determine what paperwork is needed in your neck of the woods. It's different from one district to the next. You don't want to be the middleman in the paperwork for a motion to incur debt/refinance.
7. You will probably be the one to request the payoff letters due to the BK status of your account. Always work with the BK department of your old mortgage lender. Don't go through customer service. Pick the option for debtor's counsel or trustee's counsel instead of debtors so you don't get dumped into the regular queue.
8. Don't request the payoff letter too early. They only go out to 14 days. It takes 3-7 days to generate these letters. These letters usually go to your BK attorney rather than you, so you need to make sure your BK lawyer is looking for the letter via email or fax. All of this makes timing the request difficult. Lean towards requesting the letter later with the max payoff date. Because you didn't lock early, you have a cushion of time.
9. If you are not paying off your chapter 13 and it is less than 100%, you need to make sure there is no cash to borrower. Cash to borrower is the same as a tax refund for a less than 100% case.
10. Choose a lender that will let you refinance all costs including prepaids. You don't want to be writing a big check at the end for thousands of dollars from your IRA/401k. You need to keep the IRA/401k for your retirement and emergencies during the 13.
11. You get a month without making a mortgage payment to anyone. If you time it right, you get two months. Just make sure you don't get to a 30 day late if your closing is delayed.
12. You can end your chapter 13 early by doing a cashout refi and paying off your 100% plan.
13. When modifying your ch13 plan, all of your income and expenses are subject to renewed scrutiny from the trustee. They can require receipts again for anything. IMHO, you don't change ANY of your expenses except for mortgage related expenses and paycheck deductions. Then you're far less likely to be scrutinized. Your paychecks should have the correct tax withholding prior to refinance.
14. You will need to request payoff letters at least twice. Once for the motion to refi/incur debt because the lender needs a placeholder number for the payoff. Then a second time to get the real payoff for the actual date of disbursement on the refi. As I mentioned, loan processors usually try to do this and fail because of the BK status on the account.

Hopefully this will be the last time you need to poke the bear. I won't be poking the bear anymore.

[justbroke]

flashoflight hope you don't mind that I used the LIST format so that it's easier to read. I also made this a sticky topic! Thank you!

[flashoflight]

No problem. It looks a lot better now.

[flashoflight]

Another tip I forgot to add: You will need to request payoff letters at least twice. Once for the motion to refi/incur debt because the lender needs a placeholder number for the payoff. Then a second time to get the real payoff for the actual date of disbursement on the refi. As I mentioned, loan processors usually try to do this and fail because of the BK status on the account. So you are going to be doing all the work.

[Scottowl]

Just because I have never been to Federal prison does not mean it is on my bucket list.

[flashoflight]

Epilogue:

1. A certain major mortgage lender has payoff statements that will NOT include the suspense account as part of the payoff. It would be good to find out what the payoff statements and instructions look like. Maybe you can take advantage of this.
2. It's common knowledge you get to skip a mortgage payment in every refi. While you are in chapter 13, you don't incur late fees past the 16th so you can get a 2nd payment skip. But DO NOT GO BEYOND the 29th day or you won't qualify for a refi if the deal falls through. You also don't want to trigger a RFS.
3. It's possible some of the fee arrearages can disappear if the loan is sold and not just a servicing transfer.
4. If you have mortgage arrears or payments paid thru the plan and need to do a motion to modify plan, don't file it until the trustee checks for the current month have been disbursed.

[womanonfire]

Can you refi if you have mortgage arrears?

[flashoflight]

Can you refi if you have mortgage arrears?

Yes, as long as you have no post-petition missed mortgage payments and no post-petition credit lates.