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.

Like Foreclosures, Short Sales May Prevent You From Buying a Home for Up To Seven Years

It seems like at least once a week, I get a call from someone either wanting to "Short Sale" their home, or someone about to buy one. Buying a Short Sale is fine, but make sure that when you make the offer, you have a letter from their current lender(s) that they will accept the price you have offered on the property.

Today's blog isn't about buying, but rather selling your home through a "Short Sale." What does that term actually mean. It means that the current lender is allowing you to sell the property and pay them less than what you actually owe on the current loan. Why would they do that? For the lender it can be a less costly option than going through the process of foreclosing on the property and then trying to list and sell the property themselves. It also allows them to decide right now what their loss will be. An offer in hand may be better than 4-6 months of lost payments, the expense of foreclosure, or listing the home and not getting an offer as high as what they are offered today.

What does it mean for the seller of the property. Current lending guidelines will not allow you to finance another home for at least 7 years after a foreclosure or short sale on a property. Many lenders offer home financing after a bankruptcy within 2-4 years, unless a home was involved in the process. If a home was lost due to a bankruptcy, then you could be looking at 7 years before you would qualify for another conventional or government insured home loan. This seven year prohibition from getting another loan is something that sellers are not being told when they try to sell their home through a "Short Sale."

What about the outstanding loan balance? When the lender accepts a payoff of the loan for less than what is actually owed, they can continue to show any loss as an outstanding balance that can be claimed for years to come. Why would they allow this? They allow the property to be sold to get out of the remaining balance on the loan and to eliminate the process of foreclosure. Taking a $10,000 loss now, may be less time consuming and less costly than holding onto the property and taking your chances. Banks manage losses on a daily basis and calculate the cost to sell the property versus the current loss on the loan. As a borrower, that doesn't mean that you are not still responsible for the outstanding balance. Read the documents closely and know the effect it will have on your credit in the future.

A short sale may be the right decision, but at least make it an "informed" decision.

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.