Bankruptcy and Foreclosure: How They May Delay Your Next Purchase

Almost all mortgage loan programs have restrictions on how soon after a Bankruptcy and/or Foreclosure you can purchase a new home. The minimum is typically 2 years after a bankruptcy and 3 years after a foreclosure; with re-established credit. The problem arises as to when those dates begin.

I recently had a customer that was three years past their bankruptcy discharge date and had re-established suitable credit. Their previous mortgage was included in the bankruptcy and was not contested by the lender. Unfortunately, they did not sign over their previous house to the lender with a quit claim deed and the lender went through the foreclosure process on the property. Although not contested by my borrower, the foreclosure process took 16 months to complete, adding 16 months before the clock even began running on their foreclosure.

Neither your attorney nor the judge understand the ramifications that a court proceeding may have on your credit and your ability to borrow in the future. I see this all the time with both bankruptcies and especially divorces. For now, let’s concentrate on the bankruptcy process.

During the bankruptcy, you can choose to either include the house losing the equity in your property, or you can choose to “re-affirm” that debt and continue with your payments. In my borrowers situation, they chose to walk away, not able to continue with the payments. What they should have done was to sign a quit claim deed and have it recorded, giving their rights in the property to the lender.

If you choose to re-affirm the debt, then there is also paperwork that you must complete with your lender. Otherwise, even though you never miss a payment, they will continue to report your mortgage as included in the bankruptcy and not show your current “good” payment history.

Your lawyer, and the judge, are only responsible for dealing with the matter at hand and do not look to see how that will affect you in the future. Speak with someone that understands how such an action can affect you going forward. If you know someone going through a bankruptcy or divorce, have them call me.


© 2011 Richard Swan
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.

When Should I Refinance?

A friend asked me the other day, “When should I refinance?” That is a question that I hear quite frequently and as a lender it really is not a simple answer. The best answer that I can give is know your lender and talk thoroughly about your situation.

There are several questions to ask yourself; the first one being “How long do I/we plan to be in this house?” If you intend to move, and sell your home, in 2-3 years then refinancing is not a good idea. If you intend to move, but want to keep this property as an investment and convert it to a rental property then you should still consider refinancing.

The second question is does it make sense financially? Many people tell me that it doesn’t make sense to refinance because they can’t lower their rate by 2%. You aren’t looking at how much you drop your rate, but how quickly you can recover the investment. About two years is the amount of time is should take to recover the cost of a refinance by what you save each month. If it takes longer than that, then ask yourself honestly, “How long will I be in my home?” If you intend to live there until you die, a refinance makes much more sense.

Are you currently paying mortgage insurance? Mortgage Insurance (PMI) occurs whenever you borrower more than 80% of the value of your home. If you bought a home for $200,000 and put $20,000 down, then you started with a 90% loan to value ratio. Once you pay down the principal balance to 78-80% of the original sales price (or appraised value whichever is lower) the Mortgage Insurance will automatically be removed from your payment. Let’s assume that your current balance is about $168,000 that would put you at an 84% loan to value. Even in today’s economy, it may be possible for you to get an appraisal on your home of $210,000. That would mean that if you refinanced and paid your closing costs, you could eliminate the PMI. Eliminating the PMI may make it worthwhile; even at the same rate. Appraisals are a huge part of the refinance transaction in today’s market. Most homes (at least in Knoxville) are worth more today than what someone paid for them 5 years ago. How much more depends on the neighborhood and the condition of the home.

What is the rate that makes sense for your situation? Available rates cover a wide range based on cost and credit score. For instance, Conventional 30 year rates are available today from 4.25% to 6%. Trust me, no one comes into my office and says, “I want the 6% rate.” The truth of the matter is that it costs money to borrow money and the lower your rate, the more you pay in fees. If it costs you .005% to drop your rate .125% it probably is not worth it unless you intend to stay in the property for over five years. On a $100,000 loan, dropping your rate from 4.75% to 4.625% saves you $7.50 per month. If it costs you half a point (.005%) to get the lower rate that is $500 in fees. If you divide $500 by $7.50 per month savings, it takes you over 5 years (66 months) to recover the cost of the lower rate. If you move in 5 years, you actually lost money.

When should I refinance is a personal question that deals with many options and decisions that you as an individual (or family) need to sit and discuss with your lender. Your lender should take the time to show you options and discuss whether or not it makes sense to you to refinance. My door is always open if I can help you work through your questions.


This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.

Private Mortgage Insurance: When Does It End?

When will the Private Mortgage Insurance (PMI) drop off of my home loan? A good friend of mine called me today to ask about a loan he had on a property in Florida. He financed the house with a 95% loan, but his value keeps dropping; probably below what he still owes for the house today. His question was, “At what point will my mortgage insurance drop off?”

Luckily for him, the mortgage insurance (MI) question really has to do with what you buy the home for, not what it is worth on the market today. PMI is an insurance policy to protect the lender should you default on your loan. If you were to quit making your payments and the house was foreclosed on, the MI Company would cover a certain percentage of the loss for the lender if they encountered trouble selling the property.

For you as the homeowner, once you pay down to 78% of the original purchase price (or appraised value whichever was lower at the time) then the mortgage insurance is required by federal law to drop off of your loan. In his case, he is paying about $280 per month in mortgage insurance. The MI will drop off when he pays about $3,000 additional to the principal on his loan. Since he has the cash available, it is better to pay $3,000 now on his loan, and eliminate the MI now, because that will save him $3,360 over the next 12 months.

If you have a question, send me an email: richard.swan@migonline.com and I will try to answer your question. Remember the First Time Homebuyer’s Tax Credit and the Long Time Homeowner’s Tax Credit end on April 30th. Make sure you have a contract to purchase by that time.

This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.