Home Included in Bankruptcy and the Bank didn't Foreclose right away

Erik Sandstrom

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***PLEASE READ BELOW POSTS FOR AN UPDATE TO THIS GUIDELINE, IT HAS RECENTLY CHANGED TO ALLOW BORROWERS THE ABILITY TO PURCHASE A HOME AFTER THEY HAVE INCLUDED THEIR PREVIOUS HOME IN BANKRUPTCY.***

***IF YOU CAN PROVIDE PROOF YOU INCLUDED YOUR HOME IN BANKRUPTCY WE CAN LEND 4 YEARS AFTER CHAPTER 7*** - E-mail: [email protected]

I have done a video on this topic here:


OLD INFO: Recently I've been receiving an overwhelming response from borrowers that included a home in bankruptcy, stopped paying and the bank took forever to foreclose on the property. What I will be explaining in this post is when you will be eligible for new home financing based on guidelines for different programs.

Example: Borrower filed bankruptcy, discharged 5/2009 and included a home. The home was never foreclosed until 2/2011 and at that point the deed was transferred out of their name.

Largest Misconception: The foreclosure seasoning period begins once the Bankruptcy was discharged and you can finance a home 3 years after that point with FHA. - This is NOT the case, you must wait until the deed was transferred out of the borrowers name which in the case it would be 2/2011. The seasoning period would begin starting 2/2011. UPDATE: For a conventional loan with a home included in bankruptcy, you can qualify for financing 4 years after the discharge of the BK. There is NOT a 7 year waiting period which would normally apply after the foreclosure.

Exception to the Rule: VA Loans (Veterans Administration) for Active Duty or retired military will start the seasoning period once the bankruptcy was discharged (in this case it would be 5/2009) rather than when the actual property foreclosed. VA does not punish the borrowers for how long it took the bank to actually foreclose. COMMENT: THIS IS STILL THE CASE AS OF 04/09/2018

If you are NOT active duty or retired military the programs listed below explain when this specific borrower would be eligible for a new home loan:

Details: BK discharged 5/2009, Foreclosure occurred 2/2011
1. FHA - 3 year waiting period after the bank foreclosed. This borrower would be eligible 2/2014 for a new home loan with FHA.
2. USDA - Same as above, 3 year waiting period. Borrower would be eligible 2/2014 for a new USDA home loan.
3. Conventional - 7 year waiting period after foreclosure. Borrower would be eligible 2/2018 for a conventional loan. UPDATE: This borrower would qualify for new home financing in 05/2013.
4. Financing available immediately after foreclosure for borrowers that have 30 percent down and purchase a property worth more than 430,000.00. Program is usually a 5/1 ARM with an interest rate around 4.875 percent-5.125 percent.


With the scenario's above I have been finding that many borrowers that fall into this category will go for an FHA 5/1 ARM because once the fixed rate period ends, they are eligible for Conventional financing to avoid the Mortgage Insurance that FHA requires for the life of the loan (unless 15 year term taken, then 11 years is required to have MI). On top of that the interest rates for the FHA 5/1 ARM are incredible!

If you have any questions on the above or have ran into this issue with a previous lender I would be happy to help you understand the reality of your scenario.
 
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Evan Bedard

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Excellent information Erik, we come across similar situations everyday and I'm sure your post answered many future questions!
 

AZ_Dreaming

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Apr 25, 2014
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I've read everywhere that there is really no advantage to a short sale vs a foreclosure on my home following a bankruptcy. Since there's no telling how long it might take the bank to foreclose, would this be one benefit to a short sale?
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
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That would be one benefit to a short sale, you're correct.

The other benefit is that you would be able to buy another house through a conventional program much sooner if you were to do a short sale than foreclosure. Conventional seasoning requirements for foreclosure are 7 years, a short sale is only 2 years with 20% down/equity or 4 years with 10% down. Now if you received a Notice of Default it would be 3 years conventional rather than 2.

FHA financing it doesn't matter short sale vs. foreclosure, the seasoning period for both is 3 years.

There are benefits and less of an impact on credit for short sales vs foreclosure. It all depends on what you're looking to do in the future.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
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Are you talking about a foreclosure outside of the bankruptcy? If this is what you're mentioning the best direction to take would be FHA to obtain financing the fastest.

I did confirm with out underwriting department that the new guidelines on including a home in bankruptcy that ended in foreclosure does not change Ginnie Mae's (FHA) rules. FHA will still go by when the deed was transferred out of your name and has a 3 year requirement post foreclosure.
 
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Laterwait17

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I guess part of my question was answered, it appears based on your other new posting that FannieMae has made a change to considerations for Foreclosure and Bankruptcy on the same mortgage.

I've searched for their guidelines on the web site and have come up with the following documents that I would expect are legitimate. I pulled out the relevant text from those FannieMae Documents.

The change you mentioned in your other thread sounds similar but I'm not clear on why your underwriters would have different guidelines than what FannieMae has published for the public.

Of course the published guidelines do say the different waiting periods may be applied. I could also expect there is confusion with these updates being so new.

B3-5.3-07: Significant Derogaroty Credit Events - Waiting Periods and Re-establishing Credit (07/29/2014)

Foreclosure and Bankruptcy on the Same Mortgage
If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.

Summary — All Waiting Period Requirements
The following table summarizes the waiting period requirements for all significant derogatory credit events.

Derogatory EventWaiting Period RequirementsWaiting Period with Extenuating Circumstances
Bankruptcy — Chapter 7 or 114 years2 years
Bankruptcy — Chapter 13
  • 2 years from discharge date

  • 4 years from dismissal date
  • 2 years from discharge date

  • 2 years from dismissal date
Multiple Bankruptcy Filings5 years if more than one filing within the past 7 years3 years from the most recent discharge or dismissal date
Foreclosure17 years3 years
Additional requirements after 3 years up to 7 years:

  • 90% maximum LTV ratios2

  • Purchase, principal residence

  • Limited cash-out refinance, all occupancy types
Deed-in-Lieu of Foreclosure, Preforeclosure Sale, or Charge-Off of Mortgage Account4 years2 years
1
When both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on the credit report, the lender may apply the bankruptcy waiting period if the lender obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting period must be applied.

Announcement SEL-2014-10

Waiting Period for Mortgage Debt Discharged through Bankruptcy
The Selling Guide has been updated to indicate that if a mortgage debt has been discharged through
bankruptcy, even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the
debt, the borrower is held to the bankruptcy waiting periods and not the foreclosure waiting period. Lenders
must obtain documentation to verify that the mortgage debt in question was in fact discharged as part of the
bankruptcy.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
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That's correct,
If you can provide proof that you included your home in the bankruptcy we would go based off the bankruptcy seasoning periods and not the foreclosure seasoning periods. My original post on this topic was prior to them changing the guidelines.

This new Fannie Mae rule is a big win for borrowers.
 

diesel73L

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Feb 26, 2015
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If your home was included in your bankruptcy, then the foreclosure will not show on your credit report. Just your bankruptcy.
I know this is a very old post but I am in this situation and had heard just the opposite-that late payments cannot be reported to the credit bureaus, but the foreclosure can be, because the lien is still enforceable. Regardless, I plan on giving Erik a call tomorrow to discuss my options with regard to a Fannie Mae loan as I am halfway there (mortgage discharged March 2013).
 

Jeffrey L. Shurtliff

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Dec 4, 2010
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I know this is a very old post but I am in this situation and had heard just the opposite-that late payments cannot be reported to the credit bureaus, but the foreclosure can be, because the lien is still enforceable. Regardless, I plan on giving Erik a call tomorrow to discuss my options with regard to a Fannie Mae loan as I am halfway there (mortgage discharged March 2013).
IF you file a chapter 7 bankruptcy BEFORE foreclosure the foreclosure does not show on your credit. Just the bankruptcy.
 

diesel73L

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IF you file a chapter 7 bankruptcy BEFORE foreclosure the foreclosure does not show on your credit. Just the bankruptcy.
Yes, we filed back in 2012 and haven't even defaulted on the (non-reaffirmed) mortgage yet. I think I understand now-I did some more searching on this. The missed payments and foreclosure will not affect my credit report or numerical score, but a loan officer will still find it because it's public record, correct? So conceivably, once we're four years out from discharge and the house has been foreclosed on, we can qualify for a Fannie Mae backed loan because our credit scores should be in the 700s by then (680 right now) and we'll have already exhausted the waiting period because they are counting from the discharge date.
 

diesel73L

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Feb 26, 2015
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It is always best to be honest when applying for a mortgage. Even though the lender is a crook supported by the Treasury Department.
I understand that, just was trying to determine whether or not the actual foreclosure, once it goes through, will impact my score. From what I've learned thus far it will not, but that the public record of the foreclosure will be considered in the totality of the loan application.
 

Jeffrey L. Shurtliff

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Dec 4, 2010
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I understand that, just was trying to determine whether or not the actual foreclosure, once it goes through, will impact my score. From what I've learned thus far it will not, but that the public record of the foreclosure will be considered in the totality of the loan application.
Myself I have found a home with option. Everything I wanted in a home. A realestate investor owns it. He is going to finance it for me. It will be a little higher in interest, but it is worth it to me to do business with a credible person, rather than a criminal bank.
 

Bella27143

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Jul 22, 2015
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Erik,

I am reading through so many boards and am very confused. My mortgage was included in bankruptcy a few years ago. The bank is finally starting to foreclose now and my credit report was changed to reflect that. Is there a way to dispute that and have it changed back? Also, once this is all said and done I would like to be able to purchase a house that will not be upside down in a neighborhood not full of vacant foreclosures. I am so confused at what date will apply and whether or not I should be fighting the credit report changing it. Any advice would be greatly appreciated. Thank you!
 

Jeffrey L. Shurtliff

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Dec 4, 2010
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Erik,

I am reading through so many boards and am very confused. My mortgage was included in bankruptcy a few years ago. The bank is finally starting to foreclose now and my credit report was changed to reflect that. Is there a way to dispute that and have it changed back? Also, once this is all said and done I would like to be able to purchase a house that will not be upside down in a neighborhood not full of vacant foreclosures. I am so confused at what date will apply and whether or not I should be fighting the credit report changing it. Any advice would be greatly appreciated. Thank you!
If your home was included in a 7 bankruptcy and you did not reaffirm then when and if they foreclose it is not supposed to show on your credit report. If it does you should file a complaint with the CFPB.
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
2,049
161
63
San Diego, California
www.loansreduced.com
Thanks Jeffrey!
Also if you're talking about new home financing. The time period starts when your bankruptcy was discharged (if chapter 7) as long as you checked the box "surrender" in your bankruptcy documents. Not only that but the bankruptcy seasoning periods apply, not foreclosure.

I'm not sure if this was your exact question but with a combination of both mine & Jeffrey's I think we have it covered?
 

MegKell

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Aug 30, 2016
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Thanks Jeffrey!
Also if you're talking about new home financing. The time period starts when your bankruptcy was discharged (if chapter 7) as long as you checked the box "surrender" in your bankruptcy documents. Not only that but the bankruptcy seasoning periods apply, not foreclosure.

I'm not sure if this was your exact question but with a combination of both mine & Jeffrey's I think we have it covered?
Hi Erik,

In your above statement you said-The time period starts when your bankruptcy was discharged (if chapter 7) as long as you checked the box "surrender" in your bankruptcy documents. Not only that but the bankruptcy seasoning periods apply, not foreclosure.

I did a chap7 BK that was discharged in 03/2012 and my residence was included in the BK and when I pull up my credit report it shows the mortgage included in my BK. But when I pull up my BK discharge paperwork the box you were referring to in your above comment, is NOT checked “surrendered” it’s checked “retained” Is this going to present a problem when I go to apply for a mortgage? The BK was discharged 03/2012 and the bank just foreclosed on my home and my name was removed from title on 07/27/2016. Will the mortgage underwriters use the 4 year waiting period from the BK? Thanks!