How to Get a Mortgage When You’ve Been Through Financial Hell

Published

April 30, 2014

Scott Sheldon is a senior loan officer and consumer advocate in Santa Rosa, California. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

If you have had a previous bankruptcy and lost a home recently, the road to getting a new mortgage could be treacherous. So here’s what you need to know if you tried to discharge your old house and you want to get a mortgage now.

For our purposes, we’ll be looking at Chapter 7 bankruptcy – the most common form – in which all consumer debts are canceled. These liabilities are considered unsecured, meaning not attached to real estate. Common examples include credit cards, car loans, personal loans or installment loans. A Chapter 7 fully discharges all the listed consumer debt — meaning it removes the obligation to pay and the debt is canceled.

Secured debt, on the other hand, is debt secured against real estate, such as first mortgage liens. When a house is listed under the schedule of discharged creditors, it is not canceled in the same way a consumer debt is.

The Trouble With Discharging a House in Bankruptcy

The debtor lists the house in a bankruptcy filing, but when the discharge occurs, the house ultimately goes to foreclosure. It does not matter if the discharged home was a primary home, second home or investment property; including the house in the bankruptcy can lead to foreclosure, specifically a trustee sale date.

The minimum waiting time to get a loan post-Chapter 7 bankruptcy is 2 years. The minimum waiting time to get a loan post-foreclosure is 3 years in most circumstances with government financing, and 7 years with conventional financing unless extenuating circumstances occurred. (Extenuating circumstances are considered to be one-time economic calamities such as death of the family wage earner, job loss, reduction in income or illness.)

This becomes critical if you’re seeking to qualify for a new mortgage loan. Providing the Chapter 7 discharge bankruptcy papers is simply not enough to help make your case for getting a mortgage, especially if you’ve owned a previous home that was included in the bankruptcy.

Here’s where it gets technical…

Because real property cannot be discharged in bankruptcy and the house ultimately goes to foreclosure, it’s critical to know the date of the previous foreclosure/trustee sale date, because the lender counts the ‘seasoning’ time for you to be eligible for a new loan from the most recent derogatory event.

For example, let’s say your bankruptcy was discharged in January 2011, but the house listed in the discharge went to foreclosure in June 2011. The lender will use the last date of the more recent credit event: the trustee’s sale deed in June 2011.

What You Will Need

You will need to provide an explanation to the lender as to what factors led to the previous bankruptcy as well as the foreclosure, and you will need to have reestablished credit. You will also need to have demonstrated an ability to manage your finances since the credit event. (And tracking your credit can help you follow your progress when you’re rebuilding after bankruptcy; you can get your credit scores for free from many sources, including through Credit.com.) Additionally, you’ll need to provide your lender with the actual trustee sale date. This is usually evidenced with a document, stamped and signed by the county recorder where the property is located. This can usually be obtained from county records, or in some cases directly with your lender, as sometimes they have the ability to procure these documents directly from county records.

If the prior house was listed in a bankruptcy:

Then the previous house is probably listed as a foreclosure on county records with the trustee sale date deed. The lender will use the foreclosure date, since that is the most recent derogatory credit item, and the seasoning time to get a new loan will happen from the date of the most recent last trustee sale date.

If the previous house was listed in a bankruptcy, but ultimately sold in a short sale:

Then the lender will use the most recent last date of the short sale, whichever credit item took place last. The lender will need the previous grant deed — deeding the property from you to the buyers.