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Short sale after bankruptcy will not hurt credit

Can a Short Sale After Bankruptcy Hurt My Credit?

Challenges with the economy, job loss, lay offs and a slow recovery has forced many homeowners to file for bankruptcy protection to help stop the financial bleeding of a reduced income household.

Bankruptcy can be a difficult and emotionally taxing experience.  When a family’s income is reduced, the credit card debt can slowly stack up until it gets to a point where you can’t keep up with all of your credit card payments and your mortgage payments.

Using Bankruptcy to Preserve Homeownership

It doesn’t happen over night, but the debs slowly build up until one day you realize that minimum credit card payments on top of mortgage payment are simply too much to keep up with and something’s gotta give.

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Faced with being stuck between a financial rock and a hard place, it is not uncommon to choose to eliminate the debt through the bankruptcy and continue to make the mortgage payments and preserve the family home.

Eliminating the demand of maxed out credit cards can buy you time and money to pay toward the mortgage, but if financial challenges continue you may be faced with making even harder choices about your home.

Reaffirmation of Mortgage Debt

A reaffirmation agreement excludes the debt from bankruptcy protection

As a homeowner, one of the toughest decisions facing hardship victims is how to preserve your home.  Simply including your mortgage in the bankruptcy doesn’t mean that you are free and clear, the mortgage payments still need to be made if you wish to continue to live in the home.

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Reaffirming the mortgage means that it is excluded from bankruptcy protection.  Reaffirmation means that if you default on the mortgage, or have to short sale the home in the future

In many cases, entering into bankruptcy can help open negotiations with your lender to discuss loan modification or other payment relief options.  But lenders haven’t always played nice, many times will not respond to modification requests, and simply ignore reaffirmation requests and include the mortgage in the bankruptcy.

Credit Consequences of Short Sale after Bankruptcy

When default seems inevitable, homeowners have to make tough choices.  Defaulting on a mortgage after it has been included in bankruptcy will not hurt your credit score.

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Defaulting on a mortgage after it has been included in bankruptcy will not hurt your credit score

However, when it comes to buying another home in the future, choosing foreclosure or short sale can carry different recovery periods and cause significant differences in the amount of time you will have to wait before being able to boomerang back into a home.

Timelines to buy after a bankruptcy or short sale run concurrently, meaning that if you filed for bankruptcy, and did a short sale at the same time, the waiting periods would begin simultaneously and the most restrictive (longest waiting period) would determine the date that you could buy again.

If you have questions about short sale or foreclosure after a bankruptcy, you can ask a question in the comments section below.

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About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Cindy Troyani says:

    I filed chapter 7 bankruptcy in 2008 and my mortgage was discharged. I never reaffirmed my mortgage and 11 years later I’m still upside down on my house. I am considering walking away but I’ve had some people tell me a short sale won’t hit my credit and some tell me a short sale would hit my credit? Can someone please advise?

    • Scott Schang says:

      Hi Cindy, “walking away” would result in a foreclosure, not a short sale. If you list the home for sale and the lender accepts less than the full amount owed on the mortgage, that would be considered a short sale.

      Neither of these options will be reported on your credit report, however, it is a matter of public record and may require an additional waiting period if you are trying to buy a home using specific loan programs. Your shortest option for qualifying would be Conventional financing using Fannie Mae guidelines.

      Fannie Mae will allow you to ignore any subsequent default, and the only waiting period would be the 4 years waiting period following the discharge of the bankruptcy.

      An inexperienced lender may tell you that there will be an additional waiting period, which is true only if you are trying to buy using FHA or a VA home loan.

      If you would like an introduction to an experienced loan officer that knows these guidelines and is a friend of mine, please shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in.

      Hope this helps?

  • Nicole says:

    My parents were retired, moved out of the country, and due to financial changes, death of a sibling (their oldest) we decided to let the home go as a family. Instead of short-selling the home that they still re paying a mortgage on they chose to do a bankruptcy and relinquish the home to the bank.
    I am now interested in finding the new owners of the home to purchase it. I do not see it on zillow.com and other foreclosure or similar sites and the home is said to be “off the market” with my parents listed as the current owners. This has all happened over the course of 6-8 months.
    Who do I contact to find out about purchasing the home? Do I need to wait until the bank relists the home? Should I contact my parents’ previous mortgage lenders? Or do I just need a Realtor?
    Sorry if this is convoluted!

    Thank you,


    • Scott Schang says:

      Hi Nicole, you should be able to go to the County Recorder’s office in the County where the home is located. The chain of title is a matter of public record, and there should be some documentation showing the transfer of the home. If your parents are still the owners on title, that means that the bank has not foreclosed yet. Simply filing bankruptcy does not mean that the bank owns the home. Do you know for sure that the foreclosure has taken place?

      If the foreclosure has not taken place, and your parents are still on title, then you would be negotiating with the lien holder to make catch up the current mortgage and suspend any foreclosure proceedings, if any have been started.

      Hope this helps?

  • Bobbie says:

    My husband filed chapter 7 and it was discharged January 30th 2017 the home was included in the BR. They are just now finishing up on the dil. This took place in Fl, we now live in Texas and need to get a home.. how long will we have to wait?

    • Scott Schang says:

      Hi Bobbie,

      You would be able to use a portfolio loan to buy now. Expect a 20% down payment, and a little bit higher interest rate than a traditional loan.

      The waiting periods for traditional financing would be 4 years from the discharge of the bankruptcy for conventional (you can ignore the DIL), or 3 years from the DIL date to use a FHA loan.

      If you would like to speak to a loan officer that has experience with these loans and guidelines, shoot me an email to scott@findmywayhome.com and I’ll be happy to make an introduction.

      Hope this helps?

      • Bobbie says:

        So after the two years are up from the Bankruptcy we will be able to apply for a conventional loan or a VA loan?

        • Scott Schang says:

          I’m so sorry Bobbie, I did not address VA guidelines. VA will allow you to buy in 2 years from the DIL. For VA, it’s also 2 years from the BK, which will be up prior to you meeting the 2 years for the DIL.

          A conventional loan using Fannie Mae guidelines will allow you to use the bankruptcy waiting period (4 years from discharge) and ignore any subsequent DIL.

          Your last option for traditional financing would be USDA. If you buy a home in a USDA eligible area, you can also use the Bankruptcy waiting period, which is only 3 years from discharge, and ignore the date of the DIL.

          Hope this clears things up?

  • Gayna says:

    After the death of my husband, I was forced to file Chapter 7 Bankruptcy which was discharged in September 2017. I have been making my payments on time. But after my son turned 18 and finished high school, I was no longer able to collect his survivor Social Security which caused a hardship. I had to stop making mortgage payments to apply for loan modification. The loan modification has been denied. I don’t know what I should do next. I really want to buy another home. My credit score is 633 right now.

    • Scott Schang says:

      Hi Gayna, I’m so sorry to hear about your husband. There are options for buying another home which will require a down payment of 20%. Is there equity in your current home? Or do you owe more than it’s worth? If you have equity, you may be able to sell that home, and put the money down on a new one. This would be a portfolio loan.

      Unfortunately, you would be unable to use traditional financing until the waiting periods are met. If you allow the home to foreclose, or do a short sale or deed in lieu, the waiting period is 3 years from the date your name is removed from title.

      If you can sell the home, and pay the current loan off in full, then you would be eligible for FHA financing in September 2019.

      Hope this helps?

      If you would like to speak to an experienced loan officer that can help you with a portfolio loan, feel free to send me an email directly to scott@findmywayhome.com and I can make an introduction.

      Hope this helps?

  • Anne says:

    I filed BK in 2007. The home was included. I continued to pay towards the principle balance. I am now selling the home via short sale because the buyer is paying 125000 and the bank needs 135k to satisy the lein on the property. Will this harm my credit score? How else could it affect me?

    • Scott Schang says:

      Hi Anne,

      Really good question! The short sale will NOT affect your credit score. The mortgage stopped being reported on your credit report when it was discharged through the bankruptcy.

      The short sale is a matter of public record however, and will affect when you can apply for another loan.

      Fannie Mae conventional underwriting guidelines may allow you to buy as soon as your name is off title. It’s not a black and white rule, and we’ve had a great deal of success being able to ignore the short sale if the mortgage was discharged through the bankruptcy.

      For FHA financing, there is going to be a 3 year waiting period from the date the short sale closes.

      There is a way to prevent this from being a short sale. That would mean brining in the difference between the sales price and what you owe the bank. You would have to wire money to the current lender at the close of escrow.

      If you have any other questions, or would like an introduction to a professional loan officer that has experience with these guidelines, send me an email to scott@findmywayhome.com and I’ll help anyway I can.

      Hope this helps?

  • Fred Gamble Jr says:

    I got divorced in 08/2014, discharged BK in 07/2015, short sold my home (included in BK) in 06/2016. My credit score is 640 and advancing due to the work of credit repair which I have employed since my BK. I want to purchase a home and wonder if that would be possible now. As mentioned, the BK included my home, however, it was short sold last year.

    • Scott Schang says:

      Hi Fred,

      Using a FHA loan, there is a 3 year waiting period from the short sale before you would be eligible for financing. Using a conventional, you can ignore the short sale date as long as it’s been 4 years since the bankruptcy was discharged.

      Hope this helps?

  • LLamaTiper69 says:

    My ex-wife and I had two homes we when we filed for divorce.  We each kept one house after the divorce, and transferred the deed, for each house, to each other.  In 2010 my ex-wife filed Chapter 7 bankruptcy, and I followed in 2011.  Neither of us reaffirmed the the original loans.  My ex-wife wants to short sale her house.  Should I be concerned with any tax obligations from the short sale?  The bank is asking me to sign some paper work, but I am hesitant in doing so.

  • ScottSchang says:

    Dougjen I am a lender in California, and I have a lot of experience with this scenario.  Essentially, you would be eligible for Conventional financing four years from the discharge of the bankruptcy, as long as your name is removed from title (short sale, foreclosure, deed in lieu) on the current home.
    I would suggest that you speak to a lender that can determine if you have the ability to qualify for a new home now, so that you can begin the process of having your name removed from title to the home.
    I have several lender friends across the Country that understand these guidelines and can help.  If you shoot me an email to scott@findmywayhome.com, along with the State you’re buying in, and I can introduce you to someone that may be able to help.

  • Dougjen says:

    It does help. Bk was in 2010. Now if we would like to buy another home for credit rebuilding how difficult would this be or do you have recommendations on how to move forward

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