BK, Satisfied 1st, Settled 2nd, and a new mortgage?

roadtofreedom

LoanSafe Member
Jul 19, 2012
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I filed individual BK7 back in 2009. There were two mortgage included but we "stayed and paid". Last year I began the process of settling the second mortgage because we were moving across the country and wanted to be able to sell the house. They finally agreed, they filed a lien release that shows they "received full payment and satisfaction of the same", and we have since moved. The old house is under contract now and will close next week most likely, which will satisfy the 1st.

On my credit reports, the 2nd mortgage trade lines are still showing Included in Bankruptcy as they should be. However, as an added twist - my wife did NOT file although she was on the 2nd. They incorrectly updated her trade line when I filed, which we disputed and it's been removed from 2 of the 3 CRAs. I've since disputed the third one again but it seems like a huge gamble as to how it will come back.

We are looking to buy a house in our new home state. The BK7 is seasoned enough for a conventional loan and we qualify credit and income wise.

I've been told by some that the settlement will cause an issue with underwriting and I'm a little worried. It wasn't a short sale, DIL, or foreclosure and no where on the URLA does it ask if you've settled recently.

Is this a show-stopper? Will the verbiage in the lien release be enough to move forward? Will getting this removed from that last CRA be sufficient to not draw additional attention during underwriting? We are looking to build and I don't want to get 8 months into this process just to find we can't close.
 

TomEason

LoanSafe Guide
Jun 18, 2009
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roadtofreedom

Thanks for your post. The answers to all your questions can be provided by an experienced loan broker/loan officer. I recommend you speak with at least two, as those firms likely use different lenders, each of whom has their own underwriting criteria. Loan brokers / loan officers do this stuff all the time. After all, they won't be paid unless and until they secure a new loan for a client.
 

roadtofreedom

LoanSafe Member
Jul 19, 2012
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Thanks Tom. I'm working with two already and have received "pre-qualification", which I know doesn't amount to much. The next step is pre-approval and I was told they would get UW sign-off. The problem is I will be signing a contract for new construction in between with a $5,000 deposit. I'll need to confirm under which circumstances, if any, that is refundable.

I guess I need to know how forthcoming I need to be in this situation. If it's not reporting on the CRAs, the lien shows released and the house is sold, I don't think it will come up. However if that trade line for my wife remains, or worse is noted as a charge off or something, I know for a fact it will come up. Should I be completely open about this? I don't want to lie or commit fraud but at the same time I'm not one to draw unnecessary scrutiny if I can avoid it.
 

TomEason

LoanSafe Guide
Jun 18, 2009
12,390
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SF Bay Area CA
roadtofreedom

Thanks for your post. Glad you've already consulted with lenders, and that pre-approval is under way. I presume that will be for a "take-out" loan, i.e. permanent financing. But you'll need a construction loan first, and that's your concern. You might want to consult with a RE lawyer who's practice includes residential construction loans and contracts. As for your credit file, I might suggest you NOT bother disputing again with the CRA, but have your wife send a dispute letter to the creditor (the furnisher of credit info), demanding they correct their report and no longer report that item as a "charge-off." The reason is this. Although the CRA can remove an item from your wife's file, the CRA can't prevent that derog from reappearing, and it likely will because credit info furnishers (creditors) typically report on their accounts to the CRAs every 30 days. In that letter to the creditor, you might cite the applicable provision of the FCRA, if there is one. And if there isn't, you might just make something up. Good luck.
 
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enstar

LoanSafe Member
Apr 26, 2013
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Just interested as to if you did receive financing? I am in the process of settling my second mortgage and want to try to refinance my first after the settlement. I have been told by a loan officer that mortgage companies consider settlement the same as a short sale and that it will take 3 years to qualify for a refinance after the settlement.
 

LibelFreeZone

LoanSafe Member
Jan 5, 2013
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Q: I've been told by some that the settlement will cause an issue with underwriting and I'm a little worried. It wasn't a short sale, DIL, or foreclosure and no where on the URLA does it ask if you've settled recently.

"Settled for less than owed" is considered the same as a short sale--with a 2-year waiting period. Here's the pertinent portion of Fannie Mae guidelines.

https://www.fanniemae.com/content/tool/du-clarification-foreclosure-preforeclosure-sale.pdf

A preforeclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved. At this time, there are no codes provided in the credit report data received by DU that specifically identify a preforeclosure sale. With DU Version 8.2 in December 2010, DU began issuing a message based on the presence of Remarks Codes E0047 (Settlement accepted on this account), T0140 (Settled for less than full balance), or R0107 (Account legally paid in full for less than the full balance) on a mortgage or HELOC account. However, because those codes can be used on any account for any reason, DU is not able to use those codes to identify a preforeclosure sale with 100% accuracy, so it is not able to fully automate the preforeclosure sale waiting period or eligibility requirements. When DU issues the preforeclosure sale message, the lender must confirm that the preforeclosure sale had been completed two or more years from the credit report date, and must confirm that the loan casefile complies with all other requirements specific to preforeclosure sales as specified in the Fannie Mae Selling Guide.
Effective November 16, 2013, DU [Desktop Underwriter] Version 9.1 has been rolled out. The verbiage may be a bit different, but "settled for less than owed" is still considered a short sale.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
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Jan 14, 2011
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Just to also confirm, I've dealt with this scenario in many cases. Some have been a bit unique and I'll mention that below but ultimately if there is a lien that was settled for less than owed the seasoning periods before you would be eligible are the same as a short sale from the date it reports on credit.

I have had a client that received a letter from the bank stating that they were providing him "full forgiveness" of the second lien and am actually in the midst of helping them refinance by doing a rapid re-score to accurately report the item on the credit report. We have to unfortunately wait until March with this specific scenario so I won't have an update until the future but that can be different than of course a "settled for less than owed".