Mortgage Discharged in Bankruptcy is NOT Free and Clear?

August 2014 UPDATE:  Fannie Mae has made a significant change is how it views mortgage debt included in Bankruptcy.

Now, if you had a foreclosure, short sale or deed in lieu of foreclosure after the Bankruptcy, the waiting period to buy again begins from the Bankruptcy discharge date, not the subsequent removal of your name from title! – Read More Here >> Fannie Mae Waives Waiting Period After Bankruptcy


Mortgage Discharged Through Bankruptcy

Much of this conversation has taken place in the comments sections of two articles from a few months back – Buy Again After Bankruptcy, Foreclosure and Buy Again One Day Out of Short Sale.

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All of the conversations I have had around this subject are very similar in that:

  • I discharged my mortgage through bankruptcy
  • The home is upside down but I didn’t want to lose it
  • Now I want to buy a new home with a more affordable payment

What it boils down to is that when mortgage debt is discharged through BK, it does not mean that you own the home free and clear, and it doesn’t mean that you’re off the hook for the mortgage.

When mortgage debt is discharged, you are protected against any personal liability should the home foreclose through or after the BK – this essentially means the lender cannot come after you for their losses.

Many times the mortgage debt will show up on the credit report as “included in bankruptcy” with is slightly deceiving because it implies that the debt is no longer owed…which is not the case.

The challenge is that if you decide you do not want to be shackled by  your upside down mortgage at any time in the future, you are still facing either foreclosure or short sale to rid yourself of the home.

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To buy again after bankruptcy you have to wait for 24 months before you can use a FHA loan for the purchase of a new owner occupied home.

Once the bankruptcy is complete, homeowners are still faced with the fact that refinancing into today’s lower rates is not possible due to the fact that the home is upside down.

Renting the home out to buy again after the 24 month bankruptcy wait is also a challenge, as I have detailed in this article: Can I Rent Out My Upside Down Home and Buy Again?

I am keeping a close eye on this, I think that many home owners are in this situation now after filing for bankruptcy a couple of years ago.

I think this is an important conversation to have as there are many families trying to get back on their feet after tough times.his topic?

Do you have any experience or questions around this topic?  Please leave comments and questions below if you have a specific situation you would like to discuss.

 

730 comments
Szwarc
Szwarc

Hi Scott. I had a fha loan that defaulted. In 2012 they sold the loan to another bank that was conventional. I filed bankruptcy in August 2013 and included this in it. I moved out but the bank didn't take the property back until March 2014. I did a keys for cash with it. When does my waiting period of 3 years for fha start? Would it be when they sold it to the conventional loan? Or when that bank took the keys? How would I find out?

ScottSchang
ScottSchang moderator

@Szwarc  the bank selling your defaulted mortgage would not change the loan terms.  The waiting period before you can buy again will be dictated by the type of loan you are applying for.  FHA considers the BK, and the DIL two separate events, with 2 separate timelines.  If trying to buy using FHA financing, you have a 2 year wait from the discharge of the BK, and a 3 year wait form the deed in lieu of foreclosure (cash for keys).

Conventional financing would consider the deed in lieu and BK as one event, if the mortgage was included, and discharged through the BK.  The waiting period for the BK will be used to determine your ability to buy again.  Conventional guidelines require a 4 year wait form the discharge of the BK before being eligible.


Kong123
Kong123

Hello. We had a chapter 7 discharged Oct 31, 2012. It was not foreclosed until April 2015. From what I understand, we will not be eligible for Fannie Mae/Freddie Mac until October 2016. For FHA, we will no be eligible until April 2018.


Giving that information, how likely are we to actually secure a Fannie Mae conventional loan Nov 1, 2016? I've read many things and one of those is that even though we may be eligible by Fannie Mae, many lenders still have their own underwriting guidelines that make borrowers wait much longer? Is this accurate?


We have re-established various lines of credit (we have no CC debt but open and unsecured CC's), student loans and car loans to build our credit up. We have FICO scores of 700-720 depending on the agency and no negative activity aside from the chapter 7. We have already saved a chunk of funds for down payment and will continue to save. 


Is there anything else we need to do or that I am missing that would keep us from qualifying in Nov of 2016? Thanks Scott.

Mae Russo
Mae Russo

Hi Scott, Need some information please.  I filed for bankruptcy in 2012 and is has been discharged, included was my mortgage to Chase Bank. I did continue to pay on the mortgage until October 2014, when I no longer could  handle the payments.


Last August my brother died, and left me a large amount of money. With the funds I did purchase a retirement home and a home for investment. My question to you is can Chase put a lien on my properties? Or am I clear of obligation to them if they accept the Short Sale which now is in offer to them?


Please let me know what your best advise is on how to proceed with this situation.


Bonnie

ScottSchang
ScottSchang moderator

@Mae Russo Hi Bonnie, I replied to your email also.  I am not an attorney, and am not familiar with the laws in your State.  My educated opinion is no, they cannot attach liens to other properties you own.  I would suggest speaking with a real estate attorney.

TDH53855
TDH53855

Hi Scott, I wanted to give you an update on my situation with my  bankruptcy. You gave me some info a while ago on what to do. Long story short. I filed bankruptcy back in 2011 and my house was included.It was discharged in July of 2011. I left the home at that time which is almost 5 years ago. During the procedure of bankruptcy the mortgage was transferred from one bank to another. Now it shows up in my credit report as delinquent with payments. I spoke to my lawyer and he told me to report this to all three credit bureaus which I did months ago. He said I would receive a letter in about 30 days from the bureaus which I never did but I received 3 separate letters from the bank with the mortgage reporting that there is no error and they will not change the report. Again spoke to my lawyer and he said I am suppose to receive letters from the bureaus  not the bank. So I went back into all three reports on line and all three stating that it can stay on my credit report until October of 2017. So in the meantime I can't  buy another home or even a  car with that on my report .So I don't know what else can be done. I had a real tough time getting a hold of my lawyer and noticed he was not to thrilled when speaking to me so I take it that he is pretty much done helping me. I guess I will have to wait until Oct 2017 to do anything. Thanks for reading.Hopefully this can help others with what may happen if they fall into this situation.   

ScottSchang
ScottSchang moderator

@TDH53855 I would hire a new attorney.  It is illegal for a creditor to attempt to collect a debt that has been discharged through bankruptcy.  Thank you for the update, and I'm sorry you have to go through this.  People break the law all the time, and unless you aggressively follow up, they will get away with it.  It's disgusting that they can do this to people.

Clifford86
Clifford86

Even though it was included in BK in 2010? So I should do the deed in lieu and get my name off it? Will I then be able to do a conventional. Thanks for help!

Clifford86
Clifford86

House was included in Chapter 7 bk  and discharged in 2010, I have since divorced remarried and now looking at a new loan and house. My income is back where it was before and credit is around 700. The old lender on my house is wanting a deed in leu but I don't want to hurt my chances of a new loan. Does this hurt or am I good? The house still hasn't been foreclosed and I haven't lived in it for 3 years. Never reaffirmed either. I just want to make sure I can get a new loan...

Clifford86
Clifford86

I'm buying in florida. So are you saying because the house title is still in my name I wouldn't be able to get a loan? How do I get the title out my name?

ScottSchang
ScottSchang moderator

@Clifford86 as long as the home is still in your name, the mortgage needs to be current before you could qualify for another mortgage.  If you do a deed in lieu, short sale, or foreclosure, it will not affect your credit, but may affect your timeline for buying in the future.

Using conventional financing, you would be eligible for financing as soon as your name is removed from title.  Conventional guidelines say that as long as the mortgage was discharged in the BK, that the BK waiting period (4 years) is all that will be applied.

FHA,VA, and USDA loans require a waiting period from the date your name is removed from title to the home.

What State are you trying to buy in?  I have a competent network of lenders that understand these guidelines and can help once you're in a position to buy.

ScottSchang
ScottSchang moderator

@Clifford86 Yes, that is correct.  If the mortgage is in default, and you do not intend make the mortgage current, then you would not be able to buy until you've resolved this.

There are 4 options for removing your name from title.

1. If you have equity in the home, sell it.

2. If you do not have equity, short sell it.

3. Contact the lender and request a deed in lieu of foreclosure.

4. Wait for the lender to foreclose on the home.

The first 3 options will allow you to control the timelines, the 4th option has been in affect since you stopped making payments on the mortgage.  It is not uncommon for the lender to simply let the lien hang out there until values go up so the bank can recuperate more of their losses.

krobephi
krobephi

Scott, I am in a similar situation. Ch 7 was discharged 2/26/14. This month, I will have reached 2 years. However, the bank still has not foreclose nor have I made any payments. I have tried to modify, offered Deed in Lieu and Short Sale. All were denied. I planned to do a Quit Claim Deed to remove my name form title. That said, technically Title has not been in my name fore more than 5 years. It is in my Trust. Because of this, does this meet the 2 years or more removed from title to qualify for FHA. My credit is 700+ and all is good now.

ScottSchang
ScottSchang moderator

@krobephi Hi Phillip, you cannot simply quit claim the title back the bank without their permission.  That is actually a deed in lieu of foreclosure.  Your solutions are the same as what I laid out for @Clifford86 below - sell it, short sell it, DIL, or wait for lender to foreclose.

krobephi
krobephi

I understand the Bank must agree to a Deed in Lieu. I am speaking about a Law Firm that has agree to accept a Quit Claim Deed. They plan to continue my Lawsuit against them. I am simply trying to avoid a Foreclosure of Title. I am not concerned about the deficiency balance as it would be absorbed by BK. I just don't want my credit to be affected after working so hard to improve and want to be able to buy a new house next month. My home is $350k upside down.

ScottSchang
ScottSchang moderator

@krobephi that's interesting about a Law Firm suggesting you transfer the home to them. I would be extremely cautious about that.  I am not a lawyer, so I have no idea of the legality of this, but it sounds extremely fishy to me.

Whether you have a foreclosure, short sale, or deed in lieu on your title, it does not really mean anything in terms of qualifying for a new loan.  It's not a "negative" that is considered in your ability to qualify for a new loan.

It's hard enough to get an underwriter to work through one of these deals already, the way you're proposing, I'm not sure where I would even start, and I do a lot of these types of loans.

Even if you do get your name removed from title, your timelines would be 4 years from the discharge of the bankruptcy to use conventional financing to buy your next home, or 3 years from the date that your name is removed from title for FHA financing.

This can all be very confusing, and if you're not asking the right questions, you're getting the wrong answers.  My experience is that most people do not ask the right questions.

What State are you trying to buy in?  If I cannot help you through this, I most likely know someone that can.

The bottom line is that anything other than the bank foreclosing on your defaulted mortgage is going to be very difficult to find a lender that is willing, or able to get you into a new home.  Many lenders will tell you they can, only to find out later that they cannot.  Trust me, I get several calls a day from folks all over the country that this happens to.


JayNorton
JayNorton

Hello our bankruptcy will be discharged 3 years on february 26 2016 it was a chapter 7. mortgage was included in bankruptcy we have been paying and staying since then but really want to move on, have had house on the market for a bit with little interest, What options do we have if i cant get it sold for obtaining another mortgage im in pennsylvania, Thank you for your responce

ScottSchang
ScottSchang moderator

@JayNorton your options will depend on a couple of things, first, is there equity in the home?  If so, it's possible to buy again 2 years from the BK discharge using FHA financing.  Other options would be VA financing 2 years from discharge, USDA financing 3 years from discharge, or Conventional financing 4 years from Discharge of the BK.

If your home is upside down, or you go delinquent on the payments, and the result is a short sale or foreclosure, that changes the timelines.  For FHA, VA and USDA, that would start a new waiting period.  If buying using conventional financing, you can still buy in 4 years from the discharge of the BK.

I know it's kind of confusing, let me know if you have any other questions?

JayNorton
JayNorton

If there's equity it isn't much maybe a few thousand

JayNorton
JayNorton

We are considering the usda at the end of Feb but if we get approved for that we would like to walk away from our current home but I've kept current in homes of an approval

ScottSchang
ScottSchang moderator

@JayNorton As long as the sale isn't a short sale, you should be ok.  If you retain the property through the purchase process, you're going to have to factor in your payment on the current home, as well as the payment on the new home.  Both payments will be used for determining your debt to income ratio.  Your options are: rent out the current home, sell the current home, retain the current home.  As soon as you close on your new home, you can do whatever you want with the current home.

lvelfehppy
lvelfehppy

I filed Chapter 7 BK in 2009 and discharged in January 2010.  I DID NOT reaffirm my FHA mortgage, but have been living in the home and paying the mortgage on time since the BK.  I am ready to move into another home using a conventional loan.  I am located in Georgia.  From what I've read about the new Fannie Mae guidelines, it appears I can qualify for a conventional loan.  Has anyone had experience with the recent Fannie Mae guidelines or know of lenders who are up-to-date on the new guidelines?  I am located in Georgia.  A response would be helpful.  Thank you!

ScottSchang
ScottSchang moderator

@lvelfehppy You are correct, you would be eligible with both fannie mae, and FHA at this point.  The question that will come up is what are you intentions with the current residence?  Fannie mae will allow you to rent it out, and use 75% of the rents to offset the mortgage payment.  FHA will require that you have at least 25% equity in the home, or you have to qualify for both the new payment, and your current payment.

I do have a lender that can help.  Can you send my an email to scott@findmywayhome.com and I will make an introduction?

msvhernandez315
msvhernandez315

I filed BK in 2009 and my mortgage debt was discharged through my BK. I was able to save my home by modifying it and now have an affordable payment. I have been making the payments on time for the past six years but my lender is not reporting any payments on my credit report. After contacting them they informed me that I would need to reaffirm my mortgage debt through the BK courts, open up my old BK case and retain an attorney. I wish this was not the process as it can become costly. Has anyone else had any experience on how I can go about having my mortgage reflect on my credit report without having to go through the reaffirmation process?

ScottSchang
ScottSchang moderator

@msvhernandez315 I have heard of homeowners in your situation having success with getting to a manager, or supervisor that will begin reporting again, but that is going to depend completely on the lender, and what their policy is.

The sure way to get to start reporting is to refinance it.  I have a question though, why do you need it to report?  It does not reflect negatively on you if it does not appear.  

The way that credit scores are calculated, mortgage debt is treated the same as any other installment loan.  If it shows up on your credit, and you pay it on time, it will not hurt.  It only matters in terms of an on-time payment, which is a large part of your score, but not having an account on your report will not affect your overall payment history.

If you are ever in a situation that you need to show that you've made your payments on time, for instance if you are trying to refinance, you can very easily order a verification of mortgage payments from the bank and they will provide the payment history to the lender.

Hope this helps?

tanametzger
tanametzger

Hi scott,my ex husband and I filed bankruptcy in 2010,he reaffirmed the house and 2nd mortgage and per our divorce decree he was supposed to remove me from both and he has not.do I have the right to go after him to get my name removed?

tanametzger
tanametzger

Yes it states I'm not responsible for either

ScottSchang
ScottSchang moderator

@tanametzger You would have to refinance to have your name removed from the mortgages.  You can record a Quit Claim deed to remove your name from title.  What State are you in?  I might know a lender that can look into this for you.

tanametzger
tanametzger

I am in Wisconsin. ..so it's true that he is saying technically there's nothing I can do even if he reaffirmed the debt?and also I gave received one notice of him being late.i was hoping to buy a house this year...

ScottSchang
ScottSchang moderator

@tanametzger Well, the late payments might affect your credit, but depending on how the divorce decree is written, you could avoid any challenges from the lender trying to say that you own the property.  Does the divorce decree specifically state that you are not responsible for the home, or the mortgage?

ashleymd84
ashleymd84

Hi Scott,  My husband and I filed Chapter 7 in 2010,  it was discharged in Jan 2011. We stayed in our house even though we didnt reaffirm our loan and it said included in BK.  Our house ended up developing major problems and we were upside down so we decided to walk away from it and it was foreclosed in October of 2014.  We have since built our credit up to 660 & 649 and all bills paid on time.  Will we be able to buy again soon? We were hoping to look this year, but nervous to apply. Thank you!

ashleymd84
ashleymd84

We are in Maryland, but possibly looking into the state of Pennsylvania as well. My mom mentioned to us a about USDA loan. Would that be something we would have to wait longer for? I have never heard of that type of loan till she told me and I did some research. Thank you for responding quickly.

ScottSchang
ScottSchang moderator

@ashleymd84 Yes, you would be eligible to apply for conventional financing now.  What State are you in?  There are still many lenders that are not up to speed with these underwriting guidelines, and I have a pretty good network of lenders that can help.

ScottSchang
ScottSchang moderator

@ashleymd84 That would absolutely be an option.  Both Fannie Mae conventional, and USDA will use the BK discharge date as the waiting period, and ignore the subsequent foreclosure, as long as the mortgage is discharged in the BK.  USDA waiting period is 3 years form the discharge of the BK, conventional is 4 years from the discharge.

ashleymd84
ashleymd84

We didn't include the house but after checking our credit report a year later it had the mortgage listed as included in BK. Is that what you mean?

ScottSchang
ScottSchang moderator

@ashleymd84 That means that the mortgage was included, and discharged in the BK.  Which is probably not a bad thing

MrsAndrews
MrsAndrews

My husband and I filed Chapter 13 BK in 2010.  We surrendered our home in the BK.  We had a HELOC that became an unsecured debt in the BK.  The primary mortgage was in my husband's name only.  The HELOC was in both our names.  Our BK was discharged in September 2013.  The home was later foreclosed on in February 2014, but not sold by the bank until July 2014.  I have had several lenders tell me that they could help me obtain a mortgage solely on my own, but I get half way through the process and the underwriter tells me that I have to wait the foreclosure waiting period even though I do not have a foreclosure on my credit report.  


I am confused as where to go from here.  I have been two weeks out from closing on homes, and then it falls through because I am associated with this foreclosure that was my husband's and that occurred post-BK.  When can I purchase a home?

ScottSchang
ScottSchang moderator

@MrsAndrews  There would not be a foreclosure on your credit report, because your debts were discharged through the BK 13.  Was your name on title to the home at the time of the foreclosure?  Under Fannie Mae guidelines, you should be eligible to buy using conventional financing two years after the discharge.  If using conventional financing, you can ignore the foreclosure date, and waiting period.

What State are you trying to buy in?  I may be able to recommend a lender that can help.

MrsAndrews
MrsAndrews

In the state of Florida. My name was on the title, but only because I was his spouse, as that is a requirement in the state of Florida. Lenders keep telling me that shouldn't be a problem because that is required by state law. I was recently undergoing the pre-approval process with DHI Mortgage. I provided all of my BK paperwork and the note on the first home. I have the income, and my credit score is a 700. Yesterday, the loan officer called to tell me that I could not be approved because the UW said that because my HELOC was a mortgage debt on a home that went into foreclosure I would be required to wait the foreclosure waiting period. I told her that I don't have a foreclosure on my credit report, and she basically said that even though my debts were discharged through BK it didn't matter because the HELOC was a mortgage debt that I didn't pay in full. Days prior to this she told me that I would probably be approved, but that the UW wanted to see the note from my husband's foreclosure proving that I was not listed or financially responsible. This was for an FHA loan. I've been down this road five or six times since my BK was discharged. The last lender I spoke with regarding a conventional told me that I would need to make a 20% down payment. I asked about the Conventional 97, and was told because of my BK I wouldn't qualify for less than 20% down.

ScottSchang
ScottSchang moderator

@MrsAndrews Ok, I'm not even really sure where to start on this one.  You are getting a lot of really bad information from some really misinformed lenders.

First thing first - I don't know what any of the dates are for your specific situation, but I can tell you what the guidelines are.  If you are using FHA financing, there are 2 waiting periods.  There is a 2 year waiting period after the BK, then a 3 year waiting period from the date your name was removed from title...in your case, this was the foreclosure.  These waiting periods run concurrently, so you will measure from the longest waiting period.

If you are using conventional financing, you have to have been off title for 36 months (3 years) before you would be eligible for the 97% conventional, but you can put as little as 5% down if the it's been less than 3 years since the foreclosure.  Conventional financing updated it's guidelines in August of 2014 to say that if your mortgage debt was included, and discharged in a BK, then you can use the waiting period for the BK, which is 4 years, and disregard any subsequent events, such as foreclosure.  There is nothing in fannie mae guidelines that says you must put 20% down.

If your BK was discharged longer than 4 years ago, you would be eligible now.

I can refer you to someone that understands the guidelines and can lend in Florida.  Shoot me an email to scott@findmywayhome.com and I will try to get you pointed in the right direction.

Hope this helps?

Mlssrm
Mlssrm

Hi Scott, I files a chapter 7 BK that was discharged in 9/2012. My home was discharged in bankruptcy. I finally sold my home in 11/2014. Which date does the clock start for me to purchase again. 

ScottSchang
ScottSchang moderator

@Mlssrm Great question!  The date that the "clock starts" would depend on the type of financing you are trying to use to refinance your home.  If you are using conventional financing, you could be eligible to refinance in 4 years from the discharge date of the BK.

If you are trying to use FHA financing to refinance the home, a 3 year waiting period begins from the date that your name came off title through foreclosure or short sale.

Hope this helps?

runmake 100
runmake 100

Hi Scott, I filed Chapter 7 and got my discharge on back June 2013.My sister and I bought the home together back in 2006. On Aug 2013 I did a quick claim deed to turn the house solely over to her. We both have been living in the home without paying the mortgage for the past 2 years.. We finally got a letter from Ocwen with their intention to start the process of foreclosure. The letter was addressed to myself and my sister . Since I completed the quick claim deed should they still have my name listed on the title and am I responsible in any way for this home.. I am looking to purchase a home within the next 1-2 years

ScottSchang
ScottSchang moderator

@runmake 100 Being on title, and being on the mortgage are two completely different things.  When the foreclosure occurs, it will not be reported on your credit report, because the mortgage was discharged through the BK.  Because you quit claimed off title, you should not have to deal with the Foreclosure waiting period.  Using Conventional financing, you would be eligible to buy in 4 years from the discharge date of the BK.  You might be eligible for FHA now (2 years after BK).

inneedofhelp
inneedofhelp

after the divorce I filed bankruptcy and the mortgage was discharged. now my ex has not made any payments for 9 months (he lives in the house) the mortgage co has sold the loan to a new mortgage co.  this is my question...what about the discharge in the bankruptcy am I still clear or can the new loan co come after me?

ScottSchang
ScottSchang moderator

@inneedofhelp If you filed BK, and discharged the mortgage, then the lender cannot come after you, or report the late payments on your credit report.  Depending on how your divorce decree reads, you may still be responsible for the home, just not the mortgage.  Did you quit claim off title to the home through the divorce?

inneedofhelp
inneedofhelp

So the new loan company still needs to honor the Bk of the original loan? The divorce papers say we are

both owners till sold.

ScottSchang
ScottSchang moderator

@inneedofhelp  Yes, the new loan company has to honor the BK.  BK does not affect ownership at all, it's really a credit preservation, and tax law.  You are still the owner of the home, you're just not responsible for the mortgage.

As long as you're on title, and if the mortgage payments are behind, it can prevent you from buying or refinancing in the future.  While you are not responsible for the mortgage, you are the owner of a home that is in default, which is the challenge you might encounter if you try to buy in the future.

daytha22
daytha22

Ok so I am asking for a friend.When him and his wife divorced in 2009 she stayed in the home after he left. he filed for ch 13 bankruptcy which was discharged in 2013. There is a 2 yr waiting period to buy a home after bankruptcy so his 2 yrs are up. After doing some research he finds his name is still attached to the home I had with his ex wife, which is now in foreclosure. he was getting foreclosure letters from the bank a couple months ago and called his bankruptcy atty who said he was clear and he can throw those papers away. According to the bank he am not. So he would not be able to buy another home for about another 3-7 years.

He says he could do a deed in lieu but then hes still waiting another 2 yrs which is better I guess but  doesn't trust the bank Or he isnt sure if a quit claim would help at this point

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