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Waiting period for buying after a short sale included in bankruptcy

Short Sale Waiting Period Waived if Included in Bankruptcy?

Changes to the waiting period for mortgage debt that was discharged through bankruptcy took place over the weekend of August 16th, 2014.

You are now able to purchase a home using conventional financing 4 years from the discharge date of a Chapter 7 Bankruptcy discharge, regardless of when the short sale takes place.

Confusing Wording

One of the biggest challenges we’ve encountered since this guideline change went into effect, is that the wording does not actually mention short sale, or deed in lieu for foreclosure at all.

Here is the actual wording new waiting period guideline:

Foreclosure and Bankruptcy on the Same Mortgage

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If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting period 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.

I found this to be inconsistent with Fannie Mae’s present stance on short sale or deed in lieu of foreclosure when they reduced the waiting period to 4 years from the date of the event, keeping the waiting period of 7 years from the date of a foreclosure.

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If Fannie Mae considers a short sale or deed in lieu of foreclosure as an event not quite as serious as a foreclosure, then why would they specifically leave out these events in this new guideline?

What Lenders Don’t Know

Lenders nationwide are using a literal interpretation of this guideline only applying the bankruptcy waiting period to loan applications that experienced a foreclosure after the discharge.

I get calls, emails and comments almost every day from homebuyers trying to purchase after a short sale that was discharged through bankruptcy.

Unfortunately, these lenders do not have the experience, or desire to explore this guideline, and are telling potential buyers that they must wait 4 years from the short sale date.  These lenders are wrong.

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If you’re reading this article now, hopefully it’s because you didn’t take “NO” for an answer.  Educating yourself will empower you to make informed decisions about what your choices actually are.

Short Sale Waiting Period Waived

I can speak from experience, and assure you that you can indeed disregard the waiting period for a short sale, or deed in lieu of foreclosure if the mortgage debt was included, and discharged through bankruptcy.

Because many investors are not aware of this interpretation of the guideline, or choose to not work with homebuyers with a hardship in the past, there is a lot of misinformation out there that might be confusing and discouraging for buyers that actually could buy again.

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The exception to this is if the default, and loss of the home through foreclosure, short sale, or deed in lieu took place before filing for bankruptcy.

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The challenge is that when loan officers do not want to work with folks that have had credit hardships, they do not bother to stay on top of the guideline changes created to help home buyers recover quicker, and purchase their next home.

You can ask a question or leave a comment below and I will answer quickly.  If you need an introduction to an mortgage expert with experience with these guidelines, I can help with that too.

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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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  • ScottSchang says:

    Robpep23 If the home has been foreclosed, then you are no longer the owner of the home, and would not be able to do a short sale, or buy it back from the bank.  If the BK was discharged, more likely than not it is included.  The process for NOT including a mortgage in BK is called a reaffirmation of debt, which almost no lenders will do.  If you have your old BK petition, the mortgage would be listed on there.

    Another way to find out is to look at your credit report.  The mortgage most likely says included in BK.

    Finally, you can determine if you are still the owner of the home or not by contacting the County recorders office and asking for a chain of title for your address.  If you want to email me your address, I can look it up too.  My email is scott@findmywayhome.com

    Hope this helps?

  • Robpep23 says:

    Hi Scott
    I am trying to educate myself by researching and reading as much as I can sponge from the internet.  But like you said it can all be very confusing and I have found…conflicting.
    I am basically trying to find out if my house was included in my bankruptcy? We filed for bankruptcy,  got a divorce, I was awarded the house and could not keep up on the payments.  It has since been foreclosed on and sold in a sheriffs sale.  I want to know if I am legally able to try to sell it in a short sale and buy back from bank?

  • ScottSchang says:

    soccer1971 ScottSchang USDA recently changed their guidelines to be similar to fannie mae, allowing you to use the BK discharge date, and not the sugsequent loss.  3 years from the discharge of the bankruptcy for USDA.  
    I have experience with Fannie Mae, but have not personally done this.  It should be ok.

  • soccer1971 says:

    ScottSchang soccer1971 Thanks for your reply Scott. Really appreciate the information. One last question for you. We live in a qualified rural area, how does the clock work when it comes to a USDA loan? 

    Also, when the title finally gets transferred through short sale or DIL, will that affect my FICO score?

    Thanks again Scott.

  • ScottSchang says:

    soccer1971 Using conventional financing, you would be eligible in January 2016 if you foreclose, short sale, or do a DIL, 4 years from the discharge date of the bankruptcy.  If you would like to buy your next home using FHA financing, there will be a 3  year waiting period beginning from the date your name is removed from title through either foreclosure, short sale, or DIL.
    Short sale or DIL is always the best option, mostly because you can control the timelines.  It sounds like you may have not made a payment for quite some time?  If you wait for the bank to foreclose, you are at the mercy of their timelines.
    Hope this helps?

  • soccer1971 says:

    Hi Scott,

    Looks like I’m not alone in the discussion of bankruptcy and foreclosure on the same house. So we filed chapter 7 in 2011 and it was discharged in January 2012. The loan was discharged in the bankruptcy, and they are now wanting to foreclose on the property. So the big question is when does the clock start on us trying to buy another house? Is it the date of the BK discharge, or will it be the foreclosure or short sale or deed in lieu of foreclosure date? What would be the best option for us? Just walk away, or try and short sale?

    Thanks and great website….lots of great information.

  • ScottSchang says:

    patrick724 I actually just verified this with Fannie Mae directly – you can use the 3% down.  10% down is if you are using extenuating circumstances.
    As for the underwriter saying they can do it?  I’ve seen crazier things happen.  In the end, if they fund your loan, and they cannot sell on the secondary market because they made a mistake, it’s their problem, not yours.  But I understand that when you’re confident you know the answer…you don’t want to be led down a path to the end and then be told they cannot do it.  It’s not worth it.  Especially if you only have to wait a few months to use conventional financing.

  • patrick724 says:

    Thanks for the reply Scott!
    Our lender told us that her underwriter can use the sheriff’s date, not the date the claim was paid. is there anyway she could do this?
    We are very doubtful since we do not have extenuating circumstances. 

    if we wait until 4 years post chapter 7 discharge, can we put 3% down, or is it a mandatory 10% since there was also a mortgage loan included in that same bankruptcy?