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.
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.
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.
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.
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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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Have Questions or Comments?
My husband and I filed Chapter 7 in 2009. Our mortgage was discharged but we continued living in the house and made payments until 2020. My husband died in 2020. I was going to sell the house, but needed info on why the floors were sinking. I had a foundation specialist come out to find the cause of our flooring sinking. He discovered entire support beams rotted, a sinkhole 15 feet deep, a stump 12 feet in diameter, and the vapor barrier installed incorrectly, wet, and black mold covering everything. He advised me to move somewhere else because of the mold, which I did. Repair costs between 50k and 60k, which I did not have. I contacted the lender, Mr. Cooper/Nationstar to discuss possible options and went with short sale. Approximately one month later, they became Select Portfolio Servicing. My short sale was cancelled. I have been trying since Sept. 2020 to short sale (2 times) and do a deed in lieu. Had 6 offers, all turned down because it wasn’t a good business decision for the lender. Deed in lieu was not granted based on not beneficial for lender. With this, and financial problems, I am thinking of filing bankruptcy. If possible, could you please tell me if this house could be included in bankruptcy since the lender is still wanting money. Thank you for your time.
Hi Margaret, I am so sorry to hear about your husband and your hardship. By law, the lender cannot attempt to collect money from you on the mortgage. The only recourse the lender has if you stop making payments is to foreclose, which is a matter of public record but cannot be reported on your credit.
You would have to ask an attorney if you can list debts on a new bankruptcy that are already discharged in bankruptcy. You could walk away and it’s their problem. The only challenge with walking away is you are trusting them to take the home back. If it’s in need of that much repair, they may just leave it sitting and not take your name off the title, which could impact the timeline for you buying another home in the future.
Your specific question about including the home in bankruptcy again is probably best answered by an attorney. I hope this helps?
Hi, I had a chapter 7 bankruptcy discharged in 2010. My mortgage was included in this. The mortgage is no longer on my credit report. I need to short sale my house because I cannot afford the mortgage since my divorce. I have not made payments for about 4 years but my house is not in active foreclosure. Will my credit score be affected by the short sale and how long do I have to wait to get another mortgage even if I have a qualifying down payment for the new loan. Information on different sites is conflicting and confusing. I would really appreciate a more decisive answer than what I have found so far. Thank you!!
Hi Catherine, using a conventional loan that follows Fannie Mae underwriting guidelines, you could qualify for the new home once you’ve short sold your home. The short sale will not impact your credit score if the mortgage was discharged in your bankruptcy.
The waiting period is 4 years from the discharge of the Chapter 7 bk, and you can ignore any subsequent default.
You will want to have your home sold before applying for the new home. If you are on title, the underwriter will start asking questions.
The guidelines do not actually address short sale or deed in lieu of foreclosure, but we’ve done many of these and Fannie Mae will allow it.
If you would like an introduction to someone that I know and trust that can help, you can find someone licensed in your state by searching our expert directory HERE
I hope this helps?
Thank you so much for your quick reply! Great info. Just 2 more questions please. Do these same rules apply to an FHA loan as well? In my situation does it matter if I do a short sale or a deed in lieu? Of course the real estate agents tell you to short sell because that is in their best interest. Thank you again! Totally appreciate your responses.
Unfortunately, that’s only for Fannie Mae conventional. FHA is going to be a 3 year wait from a short sale or deed in lieu. Are you sure that you couldn’t sell the home to cover the mortgage?
It doesn’t matter to you whether you do a short sale or deed in lieu. If you’re selling it short, a deed in lieu is going to be much less painful and much more convenient.
I’m trying to sell the house to cover the mortgage right now but there really isn’t much wiggle room. No offers yet.
If you’re able to sell the home and pay the mortgage in full, then you’re probably only 12 months wait to Qualify for FHA. If it’s a short sale, settled for less than amount owed, deed in lieu or foreclosure, there is a 3 year wait.
The reason for the 12 month wait is that the automated underwriting engine is only going to consider the last 12 months payment history on any mortgages you’ve had in the past.
Hello. I did not reaffirm my home mortgage In 2010 during Chapter 7 BK. I am pursuing a Short Sale now simply to let the house go. Will a short sale affect my credit ten years after the BK? Am I better off allowing the home to foreclose?
Hi Dan, a short sale will not affect your credit if it’s included in a bankruptcy. Either a short sale or a foreclosure will show up in public records, and may affect your timeline for when you would qualify for another mortgage.
Using conventional financing, you can ignore the short sale or foreclosure date. FHA financing is a 3-year waiting period from the date of a short sale or foreclosure.
Hope this helps?
I filed bankruptcy over 7 years ago. I have 20% to put down on a second home. Does it matter if my 1st home has a mortgage? I technically don’t owe anything. Does public record show the amount owed on the home?
Hi Cris, great question. Bankruptcy does not mean that you “technically don’t owe anything”, it only means that in the event that you do default on the mortgage, the creditor is not allowed to attempt to collect the debt. For credit cards and other installment debt, yes, you “technically” can not pay and it’s not reported on your credit and you don’t have to pay it back. However, if you don’t make payments on a mortgage, the bank can foreclose.
So, with all that out of the way, assuming you’re still making your payments on your mortgage for your primary residence, Fannie Mae’s guidelines will allow you to buy again 4 years from the discharge of a bankruptcy. You should have no issues if you are working with a loan officer that has experience with these guidelines.
If you would like an introduction to someone with experience in this area, you can shoot me an email to scott@findmwayhome.com and I can make an introduction to someone that I know and trust. Please include what State you’re trying to buy in.
Hope this helps?
Thanks for the info. The problem is I’m trying to buy a home, but my 1st home is underwater. J need to sell my 1st home in order to buy the next. Since it will be a short sale, it’s been over 7 years with bankruptcy, is there a program that will allow me to buy a home now?
Ok, I understand now. You could qualify for the financing for the new home, 1) if you can qualify with both payments (new and current), OR 2) if you short sale the current home and then buy the new one. This is definitely outside of the box, and Fannie Mae guidelines do not address this type of scenario. I have done this successfully, but it’s very challenging finding an underwriter that’s ok with it.
99 out of 100 loan officers will not be able to do this, but I can assure that we’ve done it before.
So it depends on the underwriter? Any idea what entails?
I think we have a solution! Check your email 🙂
Scott, just wanted to say thank you. I thank God for you. May God bless you always! You are an angel that He put in our path. We closed on our home on October 25th!
What incredible news! Congratulations 🙂 Could you do me a HUGE favor and leave a Google Review CLICK HERE so that people know that we care? THANK YOU in advance, and thank you for taking the time to report the great news!
Done! 👍🙂