The Hidden Truths Within Bankruptcy Filings
We've arrived at an unique point in the world of home buying and financing. It comes on the heels of several years of financial hardships, unprecedented foreclosures, and job losses.
These challenges faced have often lead to the filing of Bankruptcy. What's been contained, or included, in these Bankruptcy filings, are referred to as "Schedules".
First of all, let's understand the "layers" and the timelines involved in a Bankruptcy.
First, there is a: Filing Date.
That is followed by a: Discharge Date, a date that's usually a few months after the Filing.
All waiting periods (time period required prior to being capable of gaining approval for a new Mortgage) required in the Mortgage Industry are based on the Discharge Date. For simplicity, let's discuss a Chapter 7 Bankruptcy Case, which means a 2-year minimum waiting period for FHA Loans and 4 years for traditional Conventional Loans.
Now, let's complicate matters by including a property within the Bankruptcy filing. Here's where confusion and misunderstandings often come into play, as Borrowers seek to buy a new home after these events.
Please understand: All situations are unique and not every scenario fits this example. But typically, if a Mortgage was involved on the property listed in a Bankruptcy, its Mortgage Payment history is no longer reported to Credit Bureaus.
This means: No derogatory Mortgage Ratings appear on a Credit Report after the Filing Date. If looking solely at a Credit Report and at its face value, the Bankruptcy will report a Discharge Date, and the Mortgage Payment history likely shows a solid credit history up to the last reported date.
What happens after that date is where things can get very cloudy. Some property owners reinstate the Mortgage with the Lender, others do not. Still others think that no matter the case, they are "exempt" of any responsibility of the property and what happens to it moving forward.
I'm not sure what Attorneys handling a Bankruptcy tell a Homeowner and Bankruptcy Client. But it's my opinion, that there is often a communication breakdown that occurs at this point. Certainly misunderstandings or misconceptions are formed.
The unknown status of the property involved in the Bankruptcy creates problems for a new Loan Originator working with the Borrower, once the owner of the property. When trying to establish their Credit History for a new Mortgage, the LO often finds there is no record ... either private or public, as it pertains to the previously owned property (after the Filing).
The LO also finds that many times there is no CREDIT REPORT record of the Foreclosure Process initiated by the Lender holding the Bankruptcy property ... or if the property was disposed of (Sold) as a result of the Foreclosure. As a result, the LO must then determine another timeline and Waiting Period in the case of the Foreclosure.
Once again, remember: Foreclosures require Waiting Periods of three (3) years for FHA *, and seven (7) years for Conventional Mortgages.
Making things even more difficult for the LO, the Foreclosure doesn't report on the Credit Report after a Bankruptcy. It may not show or "come up" without the due diligence of an Underwriter's Review, or the Fraud Guard Report pulled by the LO/Lender working on the new financing.
The timing of the discovery can become a huge issue, and often is a function handled at the "end of the Mortgage Process", leading to frustrations on the part of all participants.
Bottom line, Lenders and Agents need to be very alert when working with clients that have faced these situations and throughout these clients' new home buying transaction. Agents must be aware that these scenarios exist and take the time to understand a client's/Borrower's full situation, if in fact a Bankruptcy is known to have occurred.
I understand that this is fundamentally a Mortgage Lender's issue. But in truth, it has the potential to become a much larger issue ... one that obviously impacts the Agents too.
I've just been asked to look into such a scenario by a Referral Partner. Their client's Mortgage Closing was to have occurred last week at another Bank. Because of the issues I describe above, it did not.
In this case, the Borrower owned two properties: A personal residence and an investment property. This person had not been fully-counseled by his Bankruptcy Attorney on the impacts of including the properties in his Bankruptcy Filing.
As his new Mortgage Lender, I have begun an investigation as to the "disposition" dates of the properties, as it looks like Foreclosures were filed. My client's future rests upon what I discover. Time ... and research, will tell how we are able to proceed ...
* If hoping to Buy, Build, or Refinance a home in the great Chicagoland area, contact me. I'll put my 37 years of Mortgage experience and expertise hard to work on your behalf.
I can be easily found at: