Casey’s Two Mortgages

I’ll try to make this short. My wife and I were discharged from a Chapter 7 almost a year ago (we’re in Colorado). We kept our home, did not reaffirm 1st (ARM) or 2nd (HELOC) mortgages.

After almost one year we are upside down in the home (value $150K, owe $210K). We starting to struggle. 2nd mortgage will not subordinate for a refinance, even though they are discharged and have no equity position. We are unable to keep up on badly needed repairs, etc., and definitely will fall behind if rates rise.

We have decided to give back the home (we’ll have no liability due to the BK). Wondering if we should do a short sale to prevent a foreclosure on our credit reports, or if it matters. 1st has not reported to credit reports in a year, but second has been reporting current payments, even though we have had lates (are they allowed to report after BK when not reaffirmed?).

We are going to stop making all payments to 1st and 2nd to save for a new home, possibly starting short sale process soon. Will we be able to buy a more modest home in 1-2 years? We will rent until then.

Casey

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Hi Casey,

The second mortgage should not be reporting any payments after the bankruptcy was filed.  The payment history up until that point remains, but not after.  The tradeline should list as ‘included in bankruptcy’.

Fannie Mae requires a forty-eight month wait after a bankruptcy to obtain a new Fannie Mae loan while FHA requires a borrower wait two years.  There’s also the issue of the deed-in-lieu or short sale.  FNMA differentiates between a short sale and foreclosure or deed-in-lieu and permits a short seller borrower to buy again with another FNMA loan in two years.  FHA, however, does not differentiate between the two and would require a three year wait.  So, given the circumstances, it appears you’ll need to wait three years to obtain another FHA loan.

In my opinion, a short sale with full release is better than a deed-in-lieu any day of the week.  If the bankruptcy was discharged then only a full release is appropriate for a short sale.  Completing a short sale can keep the public records entry of foreclosure off a credit report and in turn be less damaging to the credit score.  When there are two mortgage loans, a deed-in-lieu is generally not an option.

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.