Selling Home Subject To Existing Financing With Discharged Mortgage?

diesel73L

LoanSafe Member
Feb 26, 2015
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Our mortgage was discharged via CH7 BK in 2013. It's been nearly four years and we "stayed and paid," never reaffirmed, never refinanced. We are past BK seasoning requirements for FHA and USDA, but since our home is really only worth what we owe we can't sell it without bringing cash to closing. We've considered trying to sell the home subject to existing financing or "Sub2" as its commonly referred to. This is when a home is sold subject to existing financing and the title is simply signed over to the buyer.

Normally with a sub2 transaction the seller would still be on the hook for the mortgage even though the home is out of their name, but in this case there is no mortgage, only the lien. After our bankruptcy discharge we never reaffirmed our mortgage nor did we refinance-we simply "stayed and paid." The mortgage was discharged along with all other debts we had at the time (except for student loans of course), so the note and corresponding obligation to repay no longer exists, just the lien against the property that allows the creditor to repossess the collateral if we don't pay.

From what I've heard, underwriters usually view a subject to sale as a lease, which is subject to seasoning requirements, etc... I was told by one lender that title would have to be held by the buyer for one year and only then would they credit us 75% of the monthly payment to offset the liability. However, in our case, if the note/obligation to repay no longer exists as a result of the bankruptcy, AND we are off title, would underwriters still view us as having an obligation and therefore require us to qualify carrying both mortgages?
 

Moe Bedard

Call 1-800-779-4547
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Aug 10, 2007
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There have been LoanSafe members who were able to get financing to close on another home that were in very similar situations to yours. I'm not 100% certain what type of loans they were able to obtain, but I know it's possible.

You can try calling our forum sponsor, Erik Sandstrom with Banc Home Loans at 800-779-4547. Run your scenario by him to see what he recommends.
 

azpt22

LoanSafe Member
Apr 13, 2010
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I'm in a similar situation.... Looking to buy another home. We would about break even if we sold our current house. Current on first mortgage but have a second HELOC we havent pain in years and would love to settle. Wondering if there is any way to get financing on a new home and rent the old home and hope to settle down the road.
 

Erik Sandstrom

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Jan 14, 2011
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Hi azpt22 & diesel73l,
Each of your scenarios are unique in their own way, I'll explain how the underwriter is going to view the situation.

Diesel73l,
Your main question was whether or not you could qualify for a new home without taking into consideration of the liability on your old home. Basically avoiding the "Contingent sale" aspect of a transaction. My answer to that question is yes and no, mainly no. With you including a property in bankruptcy it is still an obligation that needs to be paid and if not paid the lender would pursue foreclosure. On a short hand explanation, that liability will be counted against you.

Now a caveat to the scenario - If you're seeking conventional financing on your new home and meet all seasoning periods to qualify there is a new guideline out that may be able to help avoid the contingent aspect. If you are able to show 1. an accepted purchase agreement and 2. contingencies have been lifted from the sale of your current residence we are able to exclude the debt from your current ratio allowing us to proceed with the purchase transaction prior to the closing of your current home. FHA, VA & USDA and the majority of portfolio lending options are not allowed to fund a new loan unless you qualify holding both liabilities.

Hopefully that answers your question.

Azpt22,
Your situation although it may be quite similar is very different in one aspect - the 2nd mortgage. That 2nd lien is going to continue to haunt you when seeking to purchase a new home. It is technically a mortgage liability that was and has not been paid in awhile which will prohibit your ability to qualify for a government or conventional backed mortgage. You must settle as you mentioned in your post prior to qualifying for a new home purchase. Now even when you settle that 2nd lien, it's still going to cause a waiting period before you can qualify (outside of portfolio products). Settling a 2nd lien is looked at as a short sale and those seasoning periods would apply (4 years for conventional, 3 years for FHA). We do however have a product with competitive rates that will allow you to purchase a new home with 20% down after an economic event like the above.

If you have any questions, please feel free to respond on this post or contact myself directly.