Foreclosure on a Home After Bankruptcy
Foreclosure and bankruptcy are never fun things to discuss. When it comes to a home, financial problems can turn shelter and a place filled with family memories into a source of stress and anxiety. Although we advise people do everything within their power to avoid foreclosure, there is light at the end of the tunnel after a major credit event like foreclosure or bankruptcy, and the good news is, the tunnel isn’t as long as many people believe.
To start, there are programs already out there (with more popping up every day) for someone with a recent bankruptcy or foreclosure. Especially for those people with good credit and some equity (or down payment if it’s a purchase loan), there are loan products available just 1 day after a foreclosure is recorded or a bankruptcy is discharged. Generally speaking, most loan products have the longest waiting periods for foreclosure, following by Chapter 7 bankruptcy, and then Chapter 13 bankruptcy (the rationale being that the repayment period of a Ch 13 counts as financial “time served” in waiting to qualify for a new loan). The products available immediately after a major credit event are out there, however the terms aren’t pretty.
That said, there is some misconception around qualifying for a conventional mortgage after a foreclosure if the foreclosed home had a mortgage that was included in bankruptcy. A foreclosure doesn’t become “official” until the deed is transferred and recorded. Depending on the state, this process can take years to be completed. However, if a borrower includes a mortgage in a bankruptcy and loses the home to foreclosure, regardless of how long the foreclosure takes, waiting periods will be based on the bankruptcy discharge date.
Let’s look at an example. Say a homeowner runs into health and financial issues to an extent that they must declare bankruptcy. If they declare a Chapter 7 bankruptcy, and it is discharged in October 2018, it’s possible that if their mortgage was included in the bankruptcy and they decided to allow the home to go through the foreclosure process, the note-holding bank on the mortgage may not complete the foreclosure process until 2019, 2020, or even later. However, the ‘waiting period’ for the home owner to get a new conventional loan in this example would be up in October 2022.
The one potential hold up or pitfall we’ve seen is that to take advantage of this provision in conventional guidelines, BOTH credit events must be completed. So in the above example, if the foreclosure process still isn’t completed in 2022, the home owner would need to wait until the foreclosure is completed and recorded before they could move forward with a new loan.
For more borrowers, the options after bankruptcy and foreclosure are going to be limited in the years following their derogatory credit event. Shorter time frames exist for government loans (FHA, VA, etc), and as we mentioned above, there are options available immediately following derogatory credit events, but for those seeking conventional financing, the waiting periods are 4 years for Chapter 7 BK, 2 years for Chapter 13 BK, and 7 years for foreclosure. UNLESS the home foreclosed upon had a mortgage included in the BK, in which case the waiting period would be that based on the Bankruptcy. The good news is Fannie Mae will not penalize you for BOTH the BK and foreclosure. Once the BK is discharged, the clock starts ticking on the waiting period to get a new mortgage, regardless of when the foreclosure is finalized.
Curious to know what your options are after a major credit event? We have many options and resources and are always willing to help you navigate the process. Feel free to ask an expert your specific questions, or complete our quick quote questionnaire to see what options you may have!