Mortgage Included in a Bankruptcy

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Know anyone that had a bankruptcy or foreclosure during the past decade?  Unfortunately, not many of us can say “no” to that question.  Here is a better question – know anyone who had both a bk and a foreclosure?   

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Bankruptcy + Foreclosure Mortgage Approval

Over the past 10 years many suffering through a bankruptcy or a foreclosure actually endured both a bankruptcy AND a foreclosure.  Commonly, bankruptcy attorneys advise their clients to include a defaulting mortgage in their bankruptcy.  Although including a mortgage in a bankruptcy is legally beneficial, how does it impact someone applying for a home loan?

As a result of a common sense change from Fannie Mae, consumers with a mortgage rolled into their bankruptcy have a faster path back to home-ownership.  In fact, they often qualify for a new home loan much sooner than the standard 7 year long post foreclosure wait period.

Mortgage & Bankruptcy – Shorter Wait to Re-Qualify

Waiting nearly a decade for your “post-foreclosure mortgage eligibility” seems evil and punitive.  After-all, 7 years is 10% of an American’s home-buying life!  The standard post-foreclosure wait is 7 years.  The standard post chapter 7 bankruptcy wait is 4 years.  However, as you probably guessed, Conventional home loan rules did not err in your favor, until now.

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Fannie Mae shortened the waiting period from 7 year to 4 years for certain foreclosure scenarios.  Now, borrower’s with a mortgage that was discharged in their bankruptcy are eligible for a new Conventional home loan in just 4 years.  4 years from what you ask?  Keep reading.

4 Year Wait for Mortgage Discharged in Bankruptcy

When the above is true, Fannie Mae allows lenders to anchor a consumer’s post foreclosure wait off their bankruptcy discharge date.  In addition, meeting the above criteria shortens the wait period to 4 years.  The mortgage must foreclose AFTER the bankruptcy filing date.  Technically, Fannie’s rule says “mortgage must be fully discharged in the bankruptcy.”  As a result, to be eligible for this shorter wait, re-affirmation of the mortgage in question is not eligible.

In conclusion, the lending industry got this right. More specifically, Fannie Mae got it right.  Financial insolvency occurs for a consumer when mortgage payments start getting missed on their mortgage.  Not after, multi year bank related foreclosure delays.  Why penalized them years beyond reason?  Post derogatory wait periods are both a punishment and a deterrent.  Fair, when within reason.  Felons get credit for time served?  Why not give home-buyers the same courtesy.

By Jeremy House

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