Mortgage and Portfolio Loan Guide

E019: When to buy a house after mortgage is included in bankruptcy

E019: When to buy a house after mortgage is included in bankruptcy

 
 
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Perhaps one of the most misunderstood guidelines in the mortgage world as it relates to buying a home after bankruptcy. Today I go deeeeeeeep into what it takes to buy after BK, and have surrendered a house in that bankruptcy (regardless of foreclosure date). Learn more at BalanceProcess.com

Mortgage Included in Bankruptcy | Eligibility Answers

There is an interesting guideline with a conventional Fannie Mae mortgage, where the waiting period to obtain new home financing is based on the bankruptcy discharge date, NOT the foreclosure date when mortgage is included in bankruptcy.

This post is for anyone who has ever had a home included in their bankruptcy, and are looking for answers on when they can buy a new home.

Waiting Period – Mortgage Included in Bankruptcy

Let me paint a picture for you to make sure we are on the same page on when this guideline is used.

You filed bankruptcy and listed your home and mortgage(s) tied to the home as included in the bankruptcy.

The bankruptcy was discharged in 2014, but the home that was included in the bankruptcy was not foreclosed until 2017.

Most lenders will tell you that you have to wait 7 years from the foreclosure date before you will be eligible for conventional financing. This is either because the loan officer is unaware or because their company has an overlay that doesn’t allow this guideline. mortgage included in bankruptcy 7 13

But wait a minute, you surrendered that property in the bankruptcy 4 years ago. The guideline states that when including a mortgage/home in a bankruptcy, the waiting period is based on bankruptcy discharge date, NOT the foreclosure date.

This is ONLY on conventional Fannie Mae loan. This guideline does NOT apply on FHA loans.

Who should pay attention

This guideline is for borrowers who vacated the property at the time the bankruptcy was discharged, or around that time. Remember, your intent was to surrender the home as part of the bankruptcy. If you stayed in the home, and were mortgage/rent free for several years, and then expect to buy a house buy using this guideline, there is a good chance the loan will be declined.

The guideline is not designed to help if you did not truly surrender the home when the bankruptcy was discharged.

If you did vacate the property, and got into a rental, paid your rent on time as promised – this guideline is perfect for you.

It is extremely common for lenders to not complete foreclosure proceedings for several years after the home was surrendered in bankruptcy. But this guideline is what saves the day.

Here is the guideline straight from Fannie Mae:

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

On conventional mortgage loans the waiting period is 4 years from chapter 7 bankruptcy discharge date. Chapter 13 bankruptcy requires 2 years from discharge date or 4 years from the dismissal date.

But if chapter 13 was dismissed, that means the bankruptcy wasn’t completed. This means the debt wasn’t settled per the agreement. So if you foreclose in that scenario, the waiting period will be 7 years.

Where to Look

The guideline above states that the lender must obtain appropriate docs to prove that the mortgage was included in the bankruptcy. What does that mean?

It’s pretty simple actually (if you retained copies of all your bankruptcy docs, not just the discharge).

When filing bankruptcy, there are many schedules (different sections) that are drawn up that identify assets and liabilities that are included and excluded in/from the bankruptcy.

What you are looking for:

  • Schedule A (Real Property – Real estate that is owned by the person filing bankruptcy)
  • Schedule C (Property claimed as exempt from the bankruptcy) – If your property is listed on the schedule C that means you do NOT intend to surrender the home in the bankruptcy
  • Schedule D (Creditors Holding Secured Claims) – This is where you will find the mortgages or other debts that are included in the bankruptcy

Chapter 7 Bankruptcy

With chapter 7 bankruptcy, it is pretty straight forward. If you mortgage was not reaffirmed, your mortgage was surrendered in the bankruptcy along with all of the other debt you listed.

Once the bankruptcy is discharged, your obligations are gone essentially.

Chapter 13 Bankruptcy

With chapter 13 bankruptcy it gets a little tricky. Traditionally, chapter 13 bankruptcy is considered to be a “reorganization of debt”, enabling individuals with regular income to develop a plan to repay all or part of their debts. You and your creditors agree to new terms on your debt per the bankruptcy terms, and you retain the assets associated with that debt. You make your payments per the bankruptcy and once all of your payments have been made, the debt or delinquency is settled.

Some people use chapter 13 bankruptcy as an instrument to actually save their homes from foreclosure. In those cases, typically the mortgage debt that is included in the bankruptcy is any arrearage (past due payments). So the bankruptcy in this case, would act as a tool to help you keep the house while getting caught up on what you owe. In this case, the home would be listed on the Schedule C in the bankruptcy (property claimed as exempt from the bankruptcy).

However, there are many cases where the home and entire mortgage is included in the chapter 13 bankruptcy. If that is the case, the home will NOT be listed on the Schedule C (property claimed as exempt from the bankruptcy), and the home is considered to be surrendered.

Special Note for Chapter 13

When the home is surrendered in chapter 13 bankruptcy, you may need more than the schedule C to convince the underwriter that the home was in fact surrendered in the BK. This (again) is because traditionally chapter 13 is considered reorganization of debt.

Showing additional proof – Each state is different, but if you’re looking to show further evidence of home being surrendered in the bankruptcy, look for a form stating: Chapter 13 Plan and Motions. This will once again declare what is to happen with the real estate, and the debt tied to that real estate upon successful completion of the chapter 13 bankruptcy.

If the home was surrendered, the chapter 13 plan and motions will state it accordingly.

Alternative

If it turns out you do not meet traditional lending standards and guidelines, a portfolio loan may be the alternative solution for you.

A portfolio loan is a mortgage designed for borrowers who don’t qualify for traditional home financing.

Whether the issue is credit related or otherwise, a portfolio loan may be the solution to get you into the home you’re looking to buy while you wait on appropriate time to pass before being eligible for traditional financing.

More on portfolio loans here.

The Most Important Thing

Keep records of all bankruptcy documents.

I cannot tell you how many times I request bankruptcy documents, and all that is provided is proof of discharge.

In order to document everything properly (and make an appropriate lending decision), lenders need all documents associated with the filing. This also includes any schedules, amendments, and discharge of the bankruptcy in question.

If you have had a mortgage included in bankruptcy, and have been told you need to wait to buy a new home based on foreclosure waiting period:

I invite you to reach out.

 

Get your questions answered.

 

If I cannot help, I should be able to point you in the right direction at the very least.

 

 

 

 

self employed home loans

 

So Your EX Destroyed Your Credit…

Portfolio Loan

Post-Divorce Mortgage

I have seen it countless times. An otherwise “A grade” borrower is left with no mortgage options because their ex-spouse was extremely irresponsible with their finances while going through divorce. Resulting many times in no other option than having to file for bankruptcy, and even foreclose on their home.

For these types of situations there is hope!

FHA, VA, and conventional guidelines are set in stone. As brutal as it sounds, they don’t really care about the sob story. If you had a nasty divorce which resulted in a bankruptcy, short-sale, or foreclosure you’re pretty much between a rock and a hard place if you have any desire to be a homeowner in the next couple years.

So what can you do? You have been a homeowner since you graduated college 15 years ago. Are you really going to be forced to live with family, or rent? NO. Believe it or not, there are lenders out there that take a common sense approach to mortgage loans for people with bad creditlending. Lenders that will look at your situation from a common sense standpoint, and make every effort to understand exactly what led to the circumstances that you’re in. Lenders that will take into consideration that you fell on hard times, but are now back on your feet. These are the lenders that offer in-house portfolio lending. Lending designed to bring common sense back into the home financing world. Where you don’t have to fit inside the little black and white boxes of the strict government guidelines.

Imagine that?  Being treated like a human being instead of a statistic. What a refreshing concept?

So where do you start? The best thing to do is seek out a small-to-mid-size lender, bank, or credit union which offers portfolio loan financing. Find out what their requirements are for these unique loans. Find out what you can do to prepare as best you can. There are still going to be requirements to meet because they want to make sure you ARE back on your feet, and confirm that you do have the ability to repay the loan.

thumb-422147_640Some things to prepare yourself for when getting a portfolio loan:

  1. You’ll probably be required to put at least 10% down.
  2. Points may be required to cover the level of risk they are taking.
  3. Typically there is no mortgage insurance requirement 🙂
  4. You need to have a verifiable income.

 

Other situations when a portfolio loan may be your best option: unique property you’re looking to buy, self-employed less than two years, bad credit because of an isolated incident like a work injury, etc.



You thought you didn’t have a chance in the world to buy a home, but don’t give up. If you’re back on your feet, and you have at least 10% for down payment, home-ownership may be more within reach than you thought.

portfolio mortgage lenders

 

I invite you to reach out to me directly to see if a portfolio loan is the right fit for you.

At the very least I should be able to point you in the right direction.

 

real estate investment loans

Repair your credit today with Lexington Law

How to Build Credit to Buy a House

Prepping Your Credit for a Mortgage

When you’re finally ready to become a homeowner; it is certainly an exciting and anxious time! The last thing anyone wants to do is find out last minute that there is a blemish on their credit report that cannot be resolved quickly enough to close on your dream home in time. In Part 1 of the “keeping your home loan process simple” series we looked at all the basics of the puzzle on a mortgage approval. In this portion we’ll look at the credit piece in detail order to keep potential home buyers in the loop on what to be ready for.

Your credit report is your opportunity to show your credibility to your lender. It serves as a reference of the liabilities you have paid in the past and present.

Your credit report is heavily considered with your approval because it gives an indication as to how you treat the responsibility of paying items you’re liable for. If you have 0 previous derogatory marks, and you have 3-4 tradelines that you have been paying on time for 24 months; your credit should be in good shape. There is no question that everyone’s situation is unique in many ways.

 

Understanding how information on your credit is evaluated can “make you” or “break you”. If you can anticipate issues that you may encounter; you’re really putting yourself a step ahead of the game. Below are a few explanations of common terms to help decipher what a credit report shows. 

Score

There are loan programs available that allow you to buy a home with a credit score below 640. However, the objective is simplicity. So with that in mind; a good goal would be to make an effort to be at 680 or higher as a middle score (as reported by Experian, Equifax, and Transunion). Anything 740 and higher is considered excellent.

History

The history on your credit report is just as important of a factor as your credit score. Anything derogatory in the last 10 years is likely to be available to the eyes of the lender.

Tradeline

Any recurring debt that is reported by the credit bureaus on your credit report is a tradeline. Examples include but are not portfolio loan past credit issueslimited to car loan, student loan, personal loan (from bank), home loan, and recreational vehicle loan. Rent payments (although important to keep record of and pay on time) and utility bills are examples of liabilities that are typically not reported on credit reports.

Debt-to-income Ratio

Your lender will use your credit report as a starting point to help determine what your debt to income ratio is. Your lender will take into account the liabilities that show on your credit report, and compare that with how much your verifiable monthly income is. Of course your new mortgage, property taxes, property insurance, and mortgage insurance (if applicable) will be factored into the equation. You certainly can expect  any child support, alimony, and 401k loans to be factored into your debt as well. 

Example: Mr. Homebuyer has 3 credit cards that total 100/month, a mortgage of 900/month (including taxes and insurance), and makes 4,000/month. Mr. Homebuyer’s debt to income ratio is .25 (or 25%). Debt / Income = Debt to income ratio. To keep things simple you want to aim to be below 43% debt to income ratio.

Derogatory Items

Derogatory items that show on your credit report will hurt your scores, and create challenges when getting a mortgage. Late payments, collections, tax liens, bankruptcies, foreclosures, short-sales, and repossessions are some examples of derogatory items that can be found on your credit report. The more recent those items have been reported; the more negatively your scores will be affected. Here are some of the most common issues and tips on how to address them.
 
  • Late payments. Any liability that is reported on your credit report showing a late payment of 30 days or more will have a negative impact on your scores. Upholding your end of the bargain (paying on time) is a significant part of establishing good credit. 
  • Collections. These can be a result of an unpaid cell phone bill or even a medical bill you forgot to pay. Really, almost anything that you agreed to pay for in any fashion can be sent to a collection agency if it remains unpaid. It’s in your bestDoes a Portfolio Loan make sense for you- (1) interest to get collections resolved as quickly as possible once you’re aware of them. In some cases collection agencies will accept less than what is owed in order to resolve the debt. However, paying the collection won’t necessarily improve your credit. To improve your scores after paying the collection; request a “letter of deletion” from the collection agency. Basically it’s a letter confirming the collection shown on your credit report has been paid in full, and will be deleted from your credit report. If you can convince the collection agency to do that then make sure you ask for a copy as well. You’ll want to send a copy of that to all 3 credit bureaus. Some collection agencies will do this; others won’t. It’s definitely worth a try. You may need to talk to a manager and get it escalated. If you have 1 or 2 medical collections that are only a few hundred dollars you don’t need to lose sleep over that. Medical collections are not treated as severely as regular collection (depending on the size of the medical collection).
  • Tax liens. If you have taxes that you owe the IRS they will issue a lien, and report that to the credit bureaus if they are not paid by the due date. The best thing to do is pay your taxes on time because if there is a lien outstanding; the IRS may start tacking on interest to the balance that is owed. Any tax liens outstanding will hinder your ability to obtain home financing until that has been paid in full. You’ll need to provide your lender with proof from the IRS that it’s paid in full and clear.
  • Bankruptcy. There are two most commonly used bankruptcy types that consumers use; chapter 7 and chapter 13. You would need to consult with an attorney to decide which is more fitting for your situation. Guidelines related to mortgage approval after bankruptcy are constantly changing. As a rule of thumb you want to be at least 3 years out from when the bankruptcy was discharged before looking to obtain financing. Immediately after the bankruptcy is discharged it’s best to make every effort to “reestablish” your credit. That involves getting a couple new tradelines in your name (credit card, personal loan, student loan…). Once you have shown a 24 month history of reestablished credit; you’re setting yourself up for success. 
  • Foreclosure and short-sale. Similar to bankruptcies; you’ll want to be at minimum of 3 years out from when the foreclosure or short-sale was closed. Again, guidelines are constantly changing on these items. Working on getting your credit reestablished as explained in the above bankruptcy explanation should be a high priority. Check here for changes on this.
  • Repossession. If you decide to “give your car back to the bank,” you can expect repercussions. Make sure that once it’s repossessed that there are no lingering debts affiliated with that. It’s a good idea to make sure all of your other liabilities are on time, and in good standing for 24 months prior to seeking home financing.
Guidelines and regulations are constantly changing.
President Obama’s recent state of the union address briefly touched on how that needs to be a priority. The fact is owning a home is generally a significant component in realizing the American Dream. Hopefully guidelines will loosen up a bit from the extreme government regulations that are currently mandated. In the mean time; use this information as a tool to set yourself apart from the average home buyer. With some preparation, you can get a mortgage for bad credit. 

A couple closing tips… 

Don’t overextend your credit limits.
If your credit cards are pushing their limits, then this can be a red flag for lenders. Try to keep your credit card account balances below 35% of your available credit limit. This may keep you from looking overextended.

Credit glossary word of the week: CHARGE-OFF

A debt that is declared by the creditor as being noncollectable. This means the lender considers the money it loaned to the borrower is lost. Lenders use this as a last resort, once all collection efforts have failed. A bankruptcy filing often results in several accounts becoming charged-off. Charge-off s usually lower credit ratings. Also known as bad debt, charged-off account, charged-off balance, charged to loss, charged to profit and loss.

 How to Build Your Credit to Buy a House

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E001: How to Build Credit to Buy a House