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Mortgage included in bankruptcy could keep you from buying again

Mortgage Discharged in Bankruptcy is NOT Free and Clear?

December 2017 UPDATE:  When Fannie Mae changed the waiting periods for a foreclosure on a mortgage included in bankruptcy in 2014, there are still lenders and underwriters that will not, or cannot, approve these loans because they do not know the guidelines.  

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

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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.

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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.

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?

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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.

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About Your Expert

Scott Schang

As a 19 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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  • Kelvin d Mack says:

    Hello, I filed bankruptcy in 2012, chpt 7.wanted to reaffirm but house was upside down and trustee abondand the home. My mortgage company closed the mortgage in 2013. I stayed and payed and the home was foreclosed in 2017. I applied for a mortgage and was told I had to wait three years because if the foreclosure. I’m confused, the bank closed the loan so how can they foreclose on me? I live in New Jersey. I would think at that point I didn’t have a mortgage. Can you please help answer this for me

    • Scott Schang says:

      Hi Kelvin, using a FHA loan, you would have a 3 year waiting period following the foreclosure. Using a Fannie Mae conventional loan, as long as the mortgage was included in the bankruptcy, the waiting period is only 4 years from the discharge of the bankruptcy, and you can ignore the foreclosure.

      I have a lender friend in NJ that has experience with these guidelines and can help. If you would like an introduction, shoot me an email to scott@findmywayhome.com and I can connect you with Tony.

      Hope this helps?

  • harold zabel says:

    my wife and I filed chapter 7 4 years ago and did reaffirm our first or second mortgages. we have paid off second mortgage our current on original , and have approx. 70,000 in equity. we wish to relocate to tenn. ,how can we access the equity to buy before we sell the house. we both will be getting new jobs ,should we buy while still working our current jobs . both of us have 10 + yrs on the job.

    • Scott Schang says:

      Hi Harold,

      As long as you paid the mortgage payments on both loans since the BK7, you could be eligible to refinance to take cash out now, whether you reaffirmed or not.

      The waiting period for a Conventional loan is 4 years from the discharge, FHA is only 2 years. The challenge with traditional financing is that you’re supposed to live in the home for at least 1 year if you do a traditional cash out refinance.

      There are a couple of ways to access your equity. The first way would be to simply do a cash out refinance. Another way might be taking out a HELOC on the home. A third way could be looking at one of these Real Estate companies that will actually buy your home so you have the money to put down on your new home. These companies are fairly new, and may not be in all States…but you can look. They include Redfin, Zillow and OpenDoor.

      You will need to have employment lined up to qualify for the purchase loan. Most likely, they will require your first pay check stub, but may qualify you off of an employment offer letter.

      You may not even need to access your equity to buy the new home! Or, you might look at refinancing into a Non-Owner Occupied loan, and rent the current home out – the rent payments will help to offset the mortgage payment on that home.

      I have professional friends all over the Country. If you would like, I can introduce you to a mortgage professional that can help figure out the best way to qualify for the purchase loan for the new home in TN.

      If you would like an introduction, shoot me an email to scott@findmywayhome.com and I’m happy to connect you to someone that I know and trust.

      Hope this helps?

  • Dan L. says:

    Hi Scott – wife and I filed chapter 7 bankruptcy amd were discharged July 2017 amd included home… we were told CT doesnt reaffirm, so we have been staying in home and paying all along.. my question; we dont receive statements anymore so I’m worried we arent abke to write off the mortgage interest any more? Is this true.
    Dan

    • Scott Schang says:

      Hi Dan,

      I would definitely consult a tax professional to clarify, but if you’re paying mortgage interest, you can deduct it on your taxes. The fact that the mortgage does not show up on your credit and you do not receive statements does not mean that you do not still owe the mortgage (and make the payments). If you wish to keep the home, all you have to do is make your payments on time.

      If you should be unable to keep up with the payments and default on the mortgage, then you would still fall under bankruptcy protection.

      Thank you for your question, hope this helps?

      • DANIEL says:

        Hi Scott,
        This definitely answers my question. 1 more, if i can.. if we eventually wanted to stay in the home in add-on, how would we go about getting a home equity line? We currently have $25,000 in equity, but as you know the home was included in bankruptcy. Does this mean we would need to refinance with another bank? Once the waiting period is up obviously?

        • Scott Schang says:

          Great follow up question, Dan. Accessing your equity can be accomplished either by taking out a HELOC (home equity line of credit) or refinancing the first mortgage to take cash out.

          HELOC guidelines do not follow Fannie Mae waiting periods normally. A HELOC is considered a much higher risk loan than a first mortgage, and therefore is likely to be more strict in terms of longer waiting periods, and limits on the maximum cash out you can get. A HELOC like you would get from you local bank is going to limit your first and second mortgages to under 80% of the value of your home.

          The cheapest and soonest you could probably access that equity would be to wait out the BK waiting period for FHA (2 years). FHA will allow you to take more cash out than any other program available on the market today.

  • Jaclyn Smith says:

    Hi Scott, my Husband and i have a discharged mortgage in a Chapter 7 on July 24th 2014. The house is hasn’t went through foreclosure. We were told we could get a mortgage after a 4 year waiting period from our BK. Our names are still on title for our old house however it is showing a zero balance on our credit report. We got pre-approved for a mortgage and have a closing date set. Now there is issues with the loan and title company. We gave the broker all the info on our credit and mortgage history and they said it wouldn’t be a problem. Help, what should we do. How can we deed the mortgage over if we have to.

    • Scott Schang says:

      Hi Jaclyn,

      Can you verify those dates for me? If the lender is trying to approve you for a conventional loan, and using the bankruptcy waiting period, then you would not be eligible until July 24th, 2018 – 4 years from 2014.

      I only know of a couple of lenders that can do this if the home is not foreclosed yet using the conventional BK waiting periods. In those cases where I’ve seen it done, you just cannot be living in the home at the time. It sounds like you’re ok there.

      I’m still confused though why you are in escrow based on that guideline if it hasn’t been 4 years yet.

      The only way to get your name off title is to sell the home, do a deed in lieu of foreclosure, or if the lender forecloses. Unfortunately you’re subject to the lender’s options and time frames.

      I guess all of this hinges on the dates though. Is 2014 correct?

    • Steve says:

      Hi Scott I would like your thoughts on this situation. We had a first and 2nd mortgages discharged in 2012 bk7. We did not reaffirm either loan. We have continued to pay the discharged 1st mortgage payment to stay in the house. We recognize we owe nothing on the notes discharged in the bk7. We also recognize both lenders hold their lien right and could foreclose. The house market value is approx 260,000.00. The current amount of the discharged 1st mortgage is 283,000.00. No fear of 2nd foreclosing on us for now. We have reestablished our credit and are 5 years post bk7 discharge. It looks like Fannie Mae guidelines uses 4 year discharge bk7 as the waiting period with a forclosure after bk7 discharge. We are thinking of letting house go to foreclosure and buying back at auction. Will this give us clear title. We are looking for ways to clear the two mortgage liens.

      • Scott Schang says:

        Hi Steve,

        When you buy the home at auction, you’re buying it from the lender. Most lenders will not let you buy your own home back at a trustees sale. In theory, it makes sense, and it’s a smart strategy. I think there’s also a huge risk that you would not be able to get the same property back. Another thought on this is that you would not be able to qualify for financing to buy the home back if you’re still living in it.

        If you are 100% committed to staying in this home, your best bet would probably be to try to settle the second, and continue to pay on the first. The fact that the home is still upside down works in your favor because the second is a LONG way from seeing enough equity to start foreclosure proceedings.

        As far as the waiting period aspect of this goes, if you were to let the home go, and the bank forecloses, and you’re not able to buy it back?….you’re still eligible for conventional financing as soon as those liens are satisfied.

        The last thing I would probably add to this is that if you stop making payments, and wait for the bank to foreclose, you’re going to be subject to their timeline. It could take months, or even years, and you would not have any control over the “disruption” that would take place once they got around to foreclosing.

        Ok, those are a few of my thoughts, hope it helps?

  • Gregory Davis says:

    Hello, I filed for bankruptcy chapter 7 and Discharged my mortgage in 02/05/2008. I did not Reaffirm the debt. I failed on a HAMP 1 in 2011. Later, I was approved for a HAMP 2 in 2013. The modification clearly states that it is understood that this loan was discharged in bankruptcy and I am not liable for the debt. My question is, can my loan servicer charge me late fees, excessive property inspection fees, and other fees on a Chapter 7 Discharged mortgage that was NOT reaffirmed, even though I entered into a HAMP 2 modification? I tend to run 30 to 60 days late. The Modification states I’m in, “Good Standing,” unless I am basically 90 days past due. What should my bankruptcy be protecting me from?

    • Scott Schang says:

      This is a great question Gregory, thank you for asking. A bankruptcy protects you against having those late payments reported on your credit report, and in the event that you default on the mortgage in the future, the foreclosure, deed in lieu of foreclosure or short sale would not be reported on your credit, and you would not have any tax penalties for losses that the lender may incur.

      That said, you are still the owner of your home, and you are still responsible for making your mortgage payments on-time if your intention is to stay in the home. The lender can absolutely charge late fees and any other charge associated with servicing your loan.

      If you stop making your payments, the lender can foreclose on the home. Also, if you attempt to refinance at any point in the future, the late payments could prevent you from future financing.

      If your intention is to stay in the home, I would recommend trying to catch up, and stay caught up on your payments. It could catch up with you at a later date if you fall too far behind.

      Hope this helps?

  • Meghan says:

    Had two mortgages, 80/20. both discharged in error in bankruptcy. Have been paying on one of them. The 20% portion I thought had written it off. I never reaffirmed or paid. All of a sudden I started getting paperwork from a company saying they bought the loan. This is the first time I am hearing from this 20% portion of the mortgage since 2009-2010. It says it was recently purchased by a private lender and they are invoking their right within the mortgage documents to a reasonable inspection. My phone has been blowing up telling me I owe this money and to enter into an agreement with them or they will foreclose on it. They sent a letter with an offer to resolve the past due amount. What do I do? Can they foreclose? Can they harass me and ask to pay after 7 years of nothing? Do I ask for proof of something? The sale, any documents, etc.? I live in Wisconsin.

    • Scott Schang says:

      Hi Meghan,

      If you stopped paying on the 20%, they do have the right to foreclose. If you plan to stay in the home, I would definitely try to settle with them.

      Do you have equity in the home? Maybe you can refinance and pay them off?

      Do not ignore their calls, and verify that they own the note and have the right to foreclose.

      • dawn Lawrence says:

        I have been in my home since 1992. I refinanced with a mortgage company in 2007. in 2009 I was layed off one payment behind they sold my note. I started pay another company. then in 2011 the company went under where I was working. three payments behind I received papers to pay off my home for $28000. I didn’t have a job could not even start to pay. I went to try and get the $25000 to help with the house at the time and the company in which Key home sold my note to would not work with the city to try and do a grant they kept telling the grant place they were a debt collection agency working on a debt. She said you cant be if you keep sending my client a mortgage statement. I also forgot to mention that in 2010 and 2011 i had to pay my own taxes and insurance. this was to be included in my mortgage. now i have filed chapter 7. the discharge was final in july of 2018. the problem i am having is how long do i keep paying for the insurance and taxes before they come and evict me and my family?

        • Scott Schang says:

          Hi Dawn, I am so sorry to hear about your hardships. It sounds like it’s been a hard journey. You said your bankruptcy is final in July 2018? Or did you mean 2017? Filing bankruptcy means that you cannot be penalized for defaulting on the mortgage, but until the bank forecloses, you are still the owner of the home. Not paying your taxes could mean that the County forecloses on the home, but it’s not likely. If you stop paying the insurance, and someone gets hurt on your property, that could expose you to financial liability.

          Do you owe more on the home that what’s it’s worth? If you do, I would recommend exploring a short sale, or deed in lieu of foreclosure. With a deed in lieu of foreclosure, sometimes the bank will even pay your moving costs in exchange for leaving the home in good condition.

          If you have equity, and if you are unable to pay the delinquent balance on the home, you can always sell it, and put the money in the bank.

          I know this is a sensitive subject, and there are several options that available to you. If you would like to email me directly, I’m more than happy to help you explore all of these options so that you’re making the most informed decision you can.

          My direct email is scott@findmywayhome.com. I hope this helps?

  • OLufemi Faro says:

    Hello. My chapter 7 b/k was discharged in August 2008. I had 3 investment properties with 2nd mortgages which where not AFFIRMED. I sent copies of the discharge papers to the banks/mortgage companies. Out of the blue, OCWEN, the snake oil company, bought the right to my 1st and and now included the discharged 2nd mortgage from 2008 and demand payment!!!. Every time I call OCWEN for an explanation regarding adding a discharged 2nd mortgage on their website, they give a million reasons and I get transferred to India where they have no idea what I am talking about. I want to know my legal options because this snake oil of a company never give me straight answer. I know the Supreme Court ruled , I believe in 2013 or 2014, on the 2nd mortgage. The banks cannot go back and seek payment. I don`t have any 2nd loan on my current residence. I need your assistance

    • Scott Schang says:

      Hi OLufemi,

      I am not an attorney, and my advice would be to contact your bankruptcy attorney and have them issue a cease and desist order to OCWEN. If your mortgages were included in the bankruptcy, then they do not have a right to attempt to collect on these debts.

      I am a mortgage lender. If this issue with OCWEN is preventing you from getting financing on your current residence, that’s something I can help with.

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