Can I Get a Home Equity Line of Credit (HELOC) During or After a Bankruptcy?
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
In this article we will answer your questions about bankruptcy and home equity line of credit (HELOC) loans as a way to get the funds you need to start over.
We’ll go over the difference between Chapter 7 and Chapter 13 bankruptcies and how they can affect your chances of getting a HELOC. You are also going to learn about other ways to pull equity from your home that may be better suited for bankruptcy situations.
If bankruptcy has been necessary for your financial strategy, you will want to read this so that you are fully prepared to maximize that strategy with all available financing options.
Getting a Home Equity Line of Credit with a Chapter 7 Bankruptcy
Let’s consider two scenarios: if you need a HELOC while still being in an active bankruptcy, and then after the bankruptcy discharge. Note that the same rules explained below apply to getting a home equity loan while in and after bankruptcy.
Can I Get a Home Equity Line of Credit While in Chapter 7 Bankruptcy?
Entering Chapter 7 bankruptcy will prevent you from getting a Home Equity Line of Credit prior to the bankruptcy being discharged. Conventional loan regulations would not allow it, and even private lenders would avoid lending on your home while you are in bankruptcy. Let’s look at why.
First, when you file for Chapter 7, if you are behind on your mortgage loan payments, or if you have trouble making those payments after filing, the lender can foreclose on your home. In order to keep your home during bankruptcy, it’s important to stay current on your loan payments.
How is this possible? There are two legal documents that you signed for your lender. One is the note which is the loan agreement. The bankruptcy removes the loan. The other document is the mortgage which is a lien on your property. This allows the lender to take your home and sell it to repay the loan. Bankruptcy does not remove the lien.
Second, although your lender can allow you to remain, the court can still decide to sell your home. The bankruptcy court will control the process and what happens to your assets. You agree to give up any assets that are not exempted by the court so they can be sold to repay your creditors.
Even though the ability to declare yourself bankrupt is found in federal law, the states have a lot to say about how your property is affected. Most states exempt part of your equity in your home. A few states exempt all of it.
If you have enough equity to consider a HELOC, and your state doesn’t exempt all of it, it’s possible that the bankruptcy trustee will want to sell your home in order to access that equity. They will repay the lender so that the lien is released, pay you the exempted amount, and give the rest of the proceeds to your creditors.
Even if your home equity is completely exempt in your state, once you turn that equity into cash with a HELOC, it would be available to the court to repay creditors.
Can I Get a Home Equity Line of Credit After a Chapter 7 Bankruptcy Discharge?
It may take a while, but eventually, you can get a HELOC after Chapter 7 bankruptcy has been discharged.
Most Chapter 7 bankruptcies are “no-asset” bankruptcies that leave all creditors unpaid. Even bankruptcies that involve the distribution of assets don’t make your creditors whole financially.
This causes your credit rating to take a severe hit. The bankruptcy will remain on your credit report for 10 years. However, if you take steps to rebuild your credit, you can get a home equity line of credit with a bankruptcy on your record before 10 years pass. Depending on the details, some conventional lenders might look at your application after 3 years.
Most HELOC lenders are going to want to see that 5 to 6 years have passed since the bankruptcy discharge and that you have a good payment history on things like utilities before lending you money. You will need to have all the documentation needed for them to have your bankruptcy discharge affirmed.
The Federal Housing Authority or FHA, which has a more relaxed credit standard, does not offer HELOC loans.
Getting a Home Equity Line of Credit with a Chapter 13 Bankruptcy
Can I Get a Home Equity Line of Credit While in Chapter 13 Bankruptcy?
The way that Chapter 13 bankruptcy is structured makes it unlikely that you could get a HELOC during bankruptcy.
To be allowed to file for Chapter 13 bankruptcy, you have to be able to show that you have continuous income. This is why Chapter 13 is sometimes called a wage earner’s plan. You will have to prepare a repayment plan for the bankruptcy court to consider.
The plan will have a list of your living expenses that the court has to approve. All of your remaining income after deducting those expenses, or your disposable income, is distributed among your creditors to repay your debts.
The plan is presented to your creditors, and you agree to meet its terms. You are basically entering into a revised agreement with your creditors.
If your income is below the median income level in your area, the plan lasts for 3 years. If it is higher than the median level, then the plan will be for 5 years.
It’s not very likely that the court will let you take on new debt during the bankruptcy plan period. The additional debt payments would take up part of your disposable income that you have promised to your original creditors. You can’t reduce the amount of disposable income that is available to them.
When the plan was originally agreed to by your creditors, they included any future earnings increases in their calculations. If you get any raises or bonuses during the plan period, those funds will be considered disposable income that is owed to your original creditors. That increased income won’t be considered additional funds that can be used for new debt.
Can I Get a Home Equity Line of Credit After a Chapter 13 Bankruptcy Discharge?
Yes, if you have kept your credit clean, and if you have enough equity in your home, you will be able to get a HELOC after Chapter 13 bankruptcy.
The conventional lenders who provide HELOC loans are not all the same. Some of the terms may be different from one lender to the next. This is particularly true with the Loan to Value ratio (LTV) that they will accept.
If you are looking for a HELOC after bankruptcy, you may not get the maximum LTV, which means that you won’t be able to use as much of your equity.
You will also need to wait until 2 years after the bankruptcy has been discharged to apply for a HELOC.
Is There a Simpler Option than Getting a Home Equity Line of Credit in a Bankruptcy Situation?
Bankruptcy is unfortunate, but it is a normal process that has been unavoidable for a lot of Americans. Coming out of bankruptcy, however, and re-creating your financial life can be difficult. You are going to need to learn about every financial strategy that can possibly help you.
One such strategy that you may not have heard of, is called a leaseback. Using this strategy, you can take advantage of the business model used by real estate investors to access your home equity and continue to live in the home.
What Is a Leaseback?
A leaseback is when you sell your home to an investor and then lease it back from them as their tenant.
Commercial business owners have done this for years. They will personally, or through a partnership, build a property for their business to rent. Then they will sell the real estate to a real estate investor with their business in place as the tenant. Usually, they agree to sign a new lease at closing. This is a big benefit for the new owner.
It used to be that in residential real estate a leaseback was a temporary arrangement that was used when a seller needed more time to move. Professional residential real estate investors have begun to use the leaseback arrangement for long term rentals that can benefit them and the seller.
When to Opt for a Leaseback Agreement
When you have been through bankruptcy, it’s not unusual for you to need cash to get back on your feet. The only collateral that you have will most likely be your home. Getting a HELOC after bankruptcy will mean waiting years. Even then, you won’t be able to use all of your equity.
If you were able to get a loan, it would mean a second mortgage payment in addition to your first house payment. This gives you less disposable income that you could be using, saving for the future, or investing. When you sell your home and then lease it back, you have one housing payment and all the cash from your home.
If home sales in your market are strong, you’d like to take advantage of that and sell your home now. With a recent bankruptcy, you won’t be able to qualify for a new loan for a replacement home. With a leaseback, you can sell your home now and buy later when you can qualify.
Pros and Cons of a Leaseback for Homeowners
A big reason to do a leaseback is the fact that it will get you all of the equity in your home. A lender’s loan to value may only be 80% or 90% at the most. With a bankruptcy on your record, you will probably qualify for less than that.
If you can only get 75% to 80% of your equity, minus the amount of your first mortgage, you will need to have a really large amount of equity in your home for a HELOC to help you.
Unlike loans, after bankruptcy, there is no waiting period for you to do a leaseback. You can get to the value in your home immediately.
Without a second mortgage that is created by a HELOC, your monthly expenses will be lower. You will only have one housing expense. Your rent payment shouldn’t be more than your original mortgage payment. This can be a huge benefit to you as you rebuild your financial life.
You also won’t have major repair expenses on the house. The new owner should be responsible for those. Eliminating those unexpected cash expenses can go a long way toward reaching financial stability.
The big downside is that someone else owns your home, not you. Your rent payment isn’t creating equity in your home anymore.
However, when you are starting over, it might make more sense to put your equity to work for you in investments that bring you a better return than your home’s slower annual value increases.
How Does a Leaseback Work for Homeowners?
You will want to find experienced residential real estate investors to work with. They will have all the tools needed to do a leaseback. If they are experienced landlords, then the only thing different about a leaseback is that they don’t have to do anything to the property or market it for rent. Their tenant is already in place.
If you can, try to interview several investors. Find out how experienced they are. How long have they owned residential real estate? Do they use a property manager or firm? What is their purchasing process? How long will the transaction take to complete?
It will be easier to sell to an investor than to a homeowner because the investor does this all the time. Since they often pay cash, there won’t be a need for appraisals and inspections that a lender has to have.
There will also be less paperwork, but one document that is very important is the lease. You will probably want to have an attorney look it over and advise you. The details that a lease should have include:
- Is there a security deposit and where will it be deposited?
- How long is the lease?
- What is the rent?
- Are there any additional rent items such as taxes and insurance?
- What exactly are your responsibilities?
- What exactly are the landlord’s responsibilities?
- Are there “holdover” provisions at the end of the lease in case you need more time to move?
You should also make an inspection tour of the property with the landlord before signing the lease so that there are no misunderstandings.
When the closing is over, you simply go back home and continue your life. You won’t have the trouble and expense of moving or putting things into storage. You won’t have to change your children’s school. It will be much easier for your family to start over without leaving your neighborhood and the comfort of the home that they have known.
How to Get a Good Leaseback Deal
Unfortunately, not all investors offer leasebacks to help homeowners. Some of them entice homeowners into an agreement with bad terms hidden in the contract and extremely low offer for the home. They intend to drain the homeowner’s funds and then keep the property they got for cheap.
A reputable leaseback company will discuss with the homeowner their ability to pay the lease amount prior to entering an agreement to find the best solution ensuring the win-win terms.
Before accepting the leaseback agreement terms, it’s imperative to do your research on the reputation of the company, read clients’ reviews, study the agreement terms and meticulously estimate your financial capabilities.
As a national platform connecting distressed homeowners with real estate investors, HouseCashin maintains relationships with reputable and professional leaseback firms all over the USA. To get equity from your home despite bad credit history and purchase the property back later, connect with a top-rated leaseback company in your location by filling out our simple online form.