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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.

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.

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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.

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.

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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?

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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 the Author

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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  • Larry says:

    Hi, My name is Larry, I am currently a year and a few months in my chapter 13, and was told that I could purchase a home. So I got qualified and recieved a pre approval letter, and found a property. Made it to the next step with the conditional approval. Then the issues started, I had assumed a loan, with my parent back in 2005 and surrendered the property in Chapter 13, but lender will not approve the loan unless, the lender removes me from the loan. How would a go about getting this done, to show that I will not be liable for the previous loan?

    • Scott Schang says:

      Hi Larry, using an FHA loan that is manually underwritten it is possible to qualify for a mortgage with the Judge’s permission. It sounds like your loan officer might be a little over their head and may not have a lot of experience with these guidelines. It’s not a guarantee that you will qualify, and it’s going to take some research and a lot of legwork to get this through an underwriter.

      I am happy to introduce you to someone that I know and trust that has experience with these guidelines. I think you should get a second opinion at this point. Get another set of eyes on your file and see if there’s anything else that your current lender missed.

      If you would like, shoot me an email at scott@findmywayhome.com and let me know what State you’re buying in.

      I hope this helps?

  • Michele Vigneri says:

    Hi Scott, My husband and I had a discharged bk 7 in February 2010 in CT. We included the house as we had no equity and missed several payments. When we filed, we retained but we did not redeem the mortgage. We lived in the house after the bk7 and paid nothing to the lender while we lived in the house looking for a rent. We were foreclosed on in 2014. The lender sold the house in 2015. We repaired our credit over the years and currently our landlord wants to sell the house we are renting from them and is giving us the first right to buy before they put it on the market. We have been going through the application process for a conventional loan and the process is now going on two months so far. We are told that because we retained on the bk 7 paperwork and didn’t surrender that we are subject to wait 7 years from transfer of title which was 2015 to the new owners. We were told if we get a letter from our bk 7 lawyer explaining why we retained then we can get the loan. We paid $200 to our bk 7 lawyer to write a letter by which he wrote that the house was surrendered in the bk 7 discharge, therefore we are subject to the 4 year waiting period from the bk 7 and we are not responsible for the transfer of title and are not subject to a 7 year waiting period from that time of transfer of title. But the lender is now saying the letter means nothing and no matter where we go, all conventional lenders will say we will need to wait 7 years from the sale/transfer of title to the new owners. We are told by the lender that we need to wait until 2022 to qualify for a conventional loan. Please HELP. We can’t believe that we have to move to another rent until we finally qualify for a conventional mortgage in 2022. What are our rights? We are completely devastated and hopeless. We thought we’d be in the clear of any repercussions of our past from 2010.

    • Scott Schang says:

      Hi Michele, that might be an overlay at this particular lender.

      I don’t know what your timeline is, but I can definitely introduce you to someone that I know and trust that can help you with this. The guideline that applies to your situation is, and I’m paraphrasing: a 4 year waiting period following the discharge of your chapter 7.

      There is no additional waiting period for the subsequent loss of a home discharged through the bankruptcy.

      Shoot me an email to scott@findmywayhome.com and let me know what State you’re in. I have friends that can help that have a lot of experience with this exact situation.

      No reason at all to worry. This is a very common situation that we’ve seen many times.

      Hope this helps?

  • Bill Jackson says:

    I went through Bankruptcy 10 years ago, and now trying to refi under a 30 yr fixed. I had also had a HELO at the time of Bankruptcy, but that was written off by the bank. When my refi loan application is showing my HELO as still due for the previous Principle + Accumulating Interest.
    I called the HELO bank, and they said that although they wrote of the loan 10 years ago, they still hold a lien on my property and if I wanted to sell/ refi, I would have to pay back the HELO.
    Is this correct, and if so, what is the likelihood they would except a much lower amount that the remaining Principle, much less principle & accumulated Interest?

    • Scott Schang says:

      Hi Bill,

      Yes, this is correct. Bankruptcy does not eliminate debt, it only prevents the debtor from coming after you to collect, or report to your credit report. It’s quite possible that the heloc company will accept less than the total amount including interest, but they really are in the driver’s seat, unfortunately.

      You also shouldn’t have any trouble refinancing if you have that defaulted Heloc out there. Using conventional financing, the “waiting period” is only 4 years from the discharge of the bankruptcy, regardless of what happens to any attached liens. You just have to have the lien removed first, which requires paying them off.

      Hope this helps?