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If you have a mortgage, you may not be aware that there is something known as the Mortgage Electronic Registration System, or MERS, that tracks its registry as well as any other mortgages that originated in America. 

The confidential database is used by companies throughout the real estate financial industry for trading and recording residential and commercial mortgages. The electronic registry makes it easier for lenders to register transfer details with the relevant county recorder whenever a loan is sold from one servicer to another.

While this may seem like a shady proposition for borrowers, it was actually created just to simplify and improve the efficiency of county land records, which can provide benefits to everyone. Plus, it’s a program that’s been approved by government agencies such as the Department of Veterans Administration (VA) and Federal Housing Administration, as well as government-sponsored entities such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association — better known as Freddie Mac and Fannie Mae.

Below, we provide a detailed look at what MERS is and how it works.

How MERS Works in the Mortgage Industry

MERS is basically just a database that allows for electronic registration of mortgage loans and deeds. It tracks mortgages for all member companies as they are sold from one financial institution to another, which happens relatively often.

After MERS was created, members no longer had to submit assignments manually to individual county recorders any time they bought or sold a loan. This helps to simplify the process and make it more efficient and accurate at the same time.

MERS plays a huge role in the mortgage banking industry, and is used by title companies, document custodians, lenders (warehouse, wholesale and retail), settlement agents, mortgage servicers and originators, county recorders, investors and even consumers.

The system digitizes all loans by assigning them a mortgage identification number, known as a MIN, when it’s registered in the database.

Benefits of MERS

There are many benefits that MERS provides to both lenders and borrowers. Because the process of recording loans and loan transfers is now simpler and more efficient, the cost of doing so is cheaper. This savings is realized not just by the lenders, though, but is also passed onto borrowers in the form of lower closing costs.

There are so many documents that are contained in a mortgage loan, and many steps that must be taken to record it properly. MERS helps to simplify the process by creating a one-stop shop for mortgage documents.

MERS doesn’t just reduce costs and improve efficiency, though. It also significantly improves transparency in tracking mortgage loans. The database is free for homeowners to access, allowing them to look up information on any of their mortgages that might be registered with the system. 

This free public access to information about home mortgages is a great step in ensuring that homeowners can easily look up which company owns their loan, in case there are any questions about it — or need to contact the company.

MERS and Real Estate

Some transactions of home loans will designate MERS as the mortgagee or the lender. These types of loans are referred to as “MOM” loans, or “MERS as Original Mortgagee.”

For deeds of trust, MERS might be named as your loan’s beneficiary, and the organization can act as your nominee. Loans can also be assigned to MERS as the sole nominee, which makes there no reason to have separate assignments every time a loan is transferred.

For the most part, MERS has little if no impact on homeowners who are paying off their mortgages. However, it has been criticized in the past for making it challenging to determine which company owns a mortgage.

For instance, during the housing crisis of 2008, some homeowners who were facing foreclosure or seeking relief from their loans had trouble figuring out which company owned their loan and, therefore, which company they needed to contact for help.

Pros and Cons of MERS

There are many pros and cons that MERS provides to the mortgage industry.

As mentioned before, the database can save lenders and borrowers time and money by creating efficiency in the process of recording mortgage loans. It’s a convenient system for tracking mortgage loans and servicing rights that also creates transparency in the industry.

At the same time, there are some downsides to the database. 

The biggest downside for homeowners is that MERS can be confusing. While there is free public access to the system, it’s not always easy to navigate or figure out where information is.

One reason for this is that lenders look to save time and recording costs by putting the loan in MERS’ name as the nominee in the land records. This potentially hides what company actually owns the loan, which creates confusion and frustration.

Looking Up Your Mortgage on MERS

If you want to look up your mortgage on MERS, you can do so by visiting MERS’ website. Once there, you can search for your mortgage by its 18-digit MIN — which is often printed on your servicer’s online portal or loan statements.

You can also look up your mortgage with a certificate number provided by the VA or FHA, your borrower details or your property address.

If your home loan is provided by Fannie Mae, Freddie Mac or some other organization, MERS’ site provides resources for how you can look up your information.

Alternatively, you can contact the company that services your mortgage to figure out how to find your property on the MERS database. Freddie Mac and Fannie Mae also offer loan lookup tools right from their website.

Importance of MERS for Borrowers

The biggest question borrowers might have is how MERS is relevant and important for them. Knowing who owns your mortgage loan is essential if you want to make any changes to your loan.

For instance, if you want to refinance your mortgage but don’t have enough equity in your home to do so through traditional means, you’ll need to know whether Freddie Mac or Fannie Mae owns your loan. This is because each agency offers different refinancing programs — and requirements — and steps that you need to follow to apply.

Even if you don’t want to refinance your home, though, it’s important to know which company owns your mortgage in case you ever need to contact them for relief options or for simple questions.

MERS Makes Recording Mortgages Easier and Cheaper

Knowing what MERS is and how it works can serve you well if you ever need help from your mortgage company. The private electronic database tracks new mortgage loans, servicing rights and ownership.

In addition to streamlining the process of recording mortgages and transfers for the mortgage industry — thereby saving time and money for lenders and borrowers alike — MERS also creates transparency for homeowners. 

Anyone can look up information about home mortgages for free on the MERS website, through an 18-digit Mortgage Identification Number (MIN) that’s assigned to every loan in the system.

While MERS operates in the background for many homeowners, it’s an important tool for borrowers, lenders and the mortgage industry as a whole.

If you are having trouble paying your mortgage, you might be worrying about whether your lender is going to foreclose on you. This is obviously something you want to avoid, as it can lead to your home being taken from you and your credit score being hit significantly.

Luckily, there are some options available to struggling borrowers who find themselves in financial hot water. Depending on what type of mortgage you have, and who your lender is, you could have various loan modification programs available to you.

These programs are designed to help borrowers avoid foreclosure if they’re having trouble meeting their mortgage payments. In this process, the original mortgage terms will be modified in some way to provide financial relief to you.

The goal of loan modification programs is to provide homeowners with financial relief so they can avoid the foreclosure process, which is not only damaging to them but challenging and undesirable to lenders as well. 

Here is some more information about loan modification programs and how they work.

Benefits of Loan Modifications

Loan modifications can be very beneficial to struggling homeowners. Making adjustments to the current terms of your loan can result in lower payments, which can help you afford your daily life and, ultimately, avoid foreclosure.

Sometimes, you could also obtain more beneficial long-term financial relief from loan modification programs, too. This could come in the form of interest rates that are lower than what they were in your original loan.

Depending on the loan modification you participate in, you might qualify for a reduced monthly mortgage payment that equals no more than 31% of your gross monthly income. This means that if you earn $50,000 per year before taxes, your monthly mortgage payment could be capped at just less than $1,300.

How the loan modification programs work depends on the specific program. No matter how it works, though, this program often allows borrowers to stay in their homes for longer and avoid foreclosure in the process.

Home Affordable Modification Program (HAMP)

The Home Affordable Modification Program, also known as HAMP, was created in 2009 to help struggling homeowners modify their mortgages. The program was created at the height of the housing market crash, and was expanded again in 2012 to aid even more families who needed help.

The goal of the program is to offer borrowers the ability to lower their monthly mortgage payments if they’re at risk of being foreclosed. It’s not just about creating a lower monthly payment in the near term, but also offers a repayment plan that is sustainable for them in the long term.

To qualify for the program, borrowers have to prove that they’re experiencing financial hardship, and that they’ll be able to afford the modified monthly mortgage payments.

How HAMP Works

HAMP provides a number of different benefits to struggling borrowers. It modifies existing mortgages by extending the loan terms, reducing interest rates or adding late payments to the principal balance.

The federal government provides incentives to mortgage servicers to encourage them to participate in the program. 

HAMP uses what’s known as a “waterfall” process to determine the specific loan modification to use, so that it achieves a targeted front-end debt-to-income ratio that’s no greater than 31%.

HAMP Eligibility and Requirements

There are certain eligibility requirements that the federal government set for borrowers to qualify for the HAMP program. 

The loan in question must have originated before 2009, be the first lien on the property and be an owner-occupied home. The outstanding principal balance of the loan must be $729,750 or lower. Plus, the principal, interest, property taxes and homeowners insurance must be more than 31% of the borrower’s gross monthly income.

To apply for the program, borrowers have to completely document their income, as well as sign an affidavit of financial hardship that shows they are having trouble making their mortgage payments. In addition, they can’t be more than 5% “underwater” on the home, can’t be delinquent on the mortgage or facing imminent default.

Once an application is made, the HAMP program will verify the borrower’s income to determine their eligibility. In some cases, the borrower may be required to pay mortgage insurance, depending on their situation.

Non-HAMP Loan Modification Options

With the HAMP program expiring in 2016, many homeowners were left without an obvious and straightforward loan modification program. But, depending on what type of mortgage you have, there could still be plenty of options available to you.

FHA Loan Modification Program

FHA loans, backed by the Federal Housing Administration, are some of the most popular mortgages available today. A loan modification program is available for borrowers who have an FHA loan and are struggling financially.

Under this program, it’s possible to modify FHA loans by extending the term of the loan, reducing its interest rate and/or adding late payments to the principal balance.

Some borrowers may also qualify for a “partial claim” option, which could reduce their outstanding principal balance by as much as 30%.

Fannie Mae and Freddie Mac Flex Modification Program

Mortgages backed by Fannie Mae and Freddie Mac also potentially qualify for the Flex Modification Program. This program is aimed at borrowers who have conventional mortgages avoid foreclosure.

This program is actually available to borrowers who are delinquent on their mortgage, as long as they aren’t more than 60 days late on payments. The Flex Modification Program could extend the current mortgage term to 480 months.

Those extra 10 years on the mortgage could significantly lower the monthly payment, though it could result in the borrower paying a larger overall amount if they see the loan through until the end.

VA Loan Modification Program

The Department of Veterans Affairs backs mortgages like the FHA does, only for veterans and their spouses. The VA also has a loan modification program that allows outstanding payment amounts that are past due to be added to the outstanding principal balance. 

In doing so, borrowers can get an entirely new payment schedule, which results in a lower monthly payment. In some cases, the monthly payment can be reduced significantly through an extension of up to as much as 10 years on the life of the mortgage.

Comparing Loan Modification Programs

While all of these loan modification programs have similarities, there are many differences, too.

HAMP was a federal program that was available to any homeowner who qualified, regardless of the type of mortgage they have. Non-HAMP programs are offered by either individual government agencies or lenders, and apply only to those types of loans.

Each of these loan modification programs have different rules and regulations to qualify. If you are having trouble paying your mortgage, the best thing to do is reach out to your mortgage service company and discover your options for a loan modification.

Choosing the Best Loan Modification Program for Your Needs

Sometimes, you’ll have a choice when it comes to loan modification programs. Other times, you may be locked into only one option.

That’s why it’s important to figure out what your options are so that you can make the best choice for you. You’ll want to consider your current financial situation, the type of mortgage that you have as well as the eligibility requirements before applying for a loan modification.

In addition, compare all the benefits and drawbacks of each program available to you so you can make the most informed decision possible.

Alternative Mortgage Relief Options

It’s possible that a loan modification program might not be available to you, or you may decide that the options that are available to you simply aren’t very attractive.

If this is the case, you could consider alternative options to receive mortgage relief. 

One such program is called the Home Affordable Refinance Program, or HARP. The Federal Housing Finance Agency created the program to aid homeowners who are underwater on their mortgages — meaning their home is worth less than the amount that they still owe on it.

The program helps borrowers refinance their mortgages with a lower interest rate and lower monthly payments that makes it more affordable for them, and sets them up for long-term financial success.

Investigate Loan Modification Programs if You’re Struggling Financially

If you’re struggling financially and having trouble repaying your mortgage, know that you are not alone. Also know that there are options available to you that would allow you to change the terms of your current mortgage and avoid foreclosure.

Various loan modification programs are available that could provide you with financial relief and allow you to stay in your home.

HAMP and non-HAMP programs offer different benefits and eligibility requirements, so it’s best for borrowers to compare the pros and cons to see which option might be best for them.

Foreclosure is the process by which mortgage lenders will attempt to reclaim their asset when a borrower doesn’t repay their home mortgage according to the terms of the agreement. When borrowers miss payments or get behind on payments, states have strict guidelines about what lenders can and must do in order to start the foreclosure process.

At the end of the foreclosure process, the lender will cause the auction sale to take place allowing a third party to purchase the property or take back control of the home and then sell it to recoup any losses they have incurred from the borrower not paying.

In some states, this is the end of the process. The lender takes the home, sells it and recoups whatever money it can at an auction sale. The borrower loses ownership of the home after their redemption period expires, and their credit is subsequently impacted.

Many states, though, allow for what’s called deficiency judgments. This provides a way for lenders to recoup any deficit that exists between what the home sold for at auction and what was owed on the mortgage.

Below, we describe in-depth what deficiency judgments are, how they work and what a borrower’s options are.

What is a Deficiency Judgment?

A deficiency judgment is an order from a court providing the lender with a money judgment that allows a lender to go after more money directly from a borrower. This can occur if, as mentioned above, the sales price of the home at auction was less than the remaining debt on the mortgage.

If a home has an outstanding debt of $200,000 but only sells for $150,000 at auction, the deficiency amount is $50,000. This is what the lender can seek to recover from the borrower through a deficiency judgment plus additional fees, costs and interest, which can accrue the longer the judgment is not satisfied.

Most commonly, deficiency judgments come after mortgage foreclosures complete. Not every state allows them, though.

Foreclosure Types and Deficiency Judgments

Just like all aspects of foreclosure, each individual state sets the rules and regulations for deficiency judgments.

Foreclosure Sale: Judicial vs. Nonjudicial Foreclosure

There are two main types of foreclosure — judicial and non-judicial. Judicial foreclosure involves the court system and will include an official court order, while a non-judicial foreclosure is a process that happens completely outside of the state court system.

In states where non-judicial foreclosures are allowed, a document within the mortgage paperwork essentially gives the lender the power to sell the home if a borrower defaults on the repayments. In states where judicial foreclosure is all that’s allowed, the court process will result in the lender receiving that right.

It’s important for both homeowners and lenders alike to understand the foreclosure process in their state. The laws that apply depend on where the home is located, and not where the lender is located.

Each state will outline the specific steps required for a foreclosure process to begin, what must be done by when, and whether a borrower has a right to redeem the property — even after it’s sold at auction.

In some states that allow deficiency judgments, lenders must file a lawsuit after the foreclosure to get a deficiency judgment. In most states that allow judicial foreclosures, the deficiency judgment will be part of the underlying foreclosure lawsuit — eliminating an extra step in the process.

Calculating Deficiency Judgments

In states where deficiency judgments are allowed, strict rules are in place to determine how much this judgment is worth — and how much a borrower might have to pay out of their pocket.

This is important in any economic environment, but especially in periods of a downturn in the real estate market. In the last major downturn that happened back in 2018, for example, home values plummeted, causing many homeowners to have a mortgage that was “underwater.”

How Deficiency Amounts are Calculated

The base of deficiency judgments is relatively easy to figure out. They are calculated by subtracting the foreclosure sale proceeds from the current principal balance on that mortgage.

So, if a borrower defaults on a $400,000 mortgage after making a substantial down payment at closing and paying the mortgage down for five years, you’ll need to first determine what the current outstanding balance is. This amount is called the outstanding principal.

In some cases, this amount could be rather close to the original mortgage amount in early years, since so much of a mortgage payment goes toward interest in the front-half of a mortgage. After five years, for instance, the principal balance on the above example could still be around $350,000 — depending on the down payment amount and how high the interest rate was.

If this home then sells for $325,000 at auction after foreclosure, the deficiency amount would be $25,000 — which is the difference between the auction sale price and the principal balance.

Some states also allow for lenders to pursue additional costs that are associated with the foreclosure process. 

Lenders Collecting Deficiency Judgments

Since deficiency judgments are court orders, they allow lenders to place liens on a borrower’s other property if they are successful. This could allow them to freeze a borrower’s bank accounts or to garnish their wages to collect on the outstanding debt.

Lenders that win deficiency judgments will collect this debt like all other unsecured forms of debt. Borrowers may not have to pay the full amount upfront, but rather could come up with a payment plan to satisfy this debt.

State Laws and Deficiency Judgments

Each individual state determines what type of foreclosure process is used and whether lenders are able to pursue deficiency judgments for any remaining debt.

States That Allow Deficiency Judgments

All but six states allow deficiency judgments. Only Washington, Oregon, Montana, Minnesota, California and Alaska forbid deficiency judgments in most instances.

There are some other states such as Arizona that have limits on deficiency judgments. In that state, for instance, deficiency judgments are not allowed for one- or two-family homes that sit on 2.5 acres or less.

Unfortunately, not only do deficiency judgment laws vary by state, but they can be very complicated, too. That’s why it’s important for borrowers to consult with an experienced foreclosure law firm in their state if they’re facing mortgage foreclosure and a possible deficiency judgment.

Deficiency Judgment Timeline

How long it takes for a deficiency judgment to put in place again depends on the state in which it occurs. Each state sets a defined process for what has to happen in order for a lender to file a deficiency judgment suit, and how long it takes to proceed through the court system.

Some states require lenders to act immediately after a foreclosure sale is completed, while others have a longer statute of limitation that allows lenders to wait several years to collect a deficiency judgment.

Borrower Options

Borrowers do possess some rights throughout the foreclosure process, including in regard to deficiency judgments. It’s possible that if you’re facing such a judgment, you could request that your lender waive their right to pursue a judgment after the home is sold.

It’s also possible that if a deficiency judgment is put in place, you could file a legal motion to overturn it. However, this process could be expensive and time-consuming, and require the help of an experienced lawyer.

If you’re hard-pressed financially, you may consider declaring bankruptcy, which could ultimately result in your debts, including any deficiency judgment against you, being discharged by a bankruptcy court.

Impact on Junior Liens

On most mortgages, senior lien holders hold the ultimate rights to secure their outstanding debt. If you have a second mortgage, home equity line of credit (HELOCS) and other junior loans, those lenders will likely lose their security interest in the real estate property once the senior lien holder forecloses.

The only way that those junior lien holders may receive payment from a foreclosure is if the foreclosure sale amount far exceeds the outstanding principal on the primary mortgage.

Conclusion

Deficiency judgments allow lenders to go after borrowers for any difference in the amount that exists between the outstanding principal on a mortgage and how much the home sells for after a foreclosure. These laws, like all foreclosure laws, differ greatly by state and are sometimes hard to understand.

That being said, it’s very important to understand the foreclosure process and deficiency judgment laws in your state so that you can protect yourself if you’re ever in trouble. Deficiency judgments laws can have a significant impact on not only your credit history but your personal finances as well.

Babi Legal Group is a Michigan-based law firm experienced in many areas of law, including debt collection and settlement, bankruptcy and real estate. If you’re facing foreclosure and/or a deficiency judgment, contact us to find out what your rights are and how we can help you.

Most homeowners know that if you find yourself in financial trouble and behind on your mortgage payments, you could face foreclosure from the lending company. But, did you know that you could also be foreclosed on if you don’t pay your property taxes?

Different states have different rules for foreclosure, which affects when the process can start, what happens while it proceeds and what can be done to end foreclosure. There are also rules and regulations that affect any over payments that can potentially be reclaimed by the homeowner.

Below, we dive deeper into these topics to shed more light on them.

Understanding Foreclosure

Generally speaking, foreclosure is a process that an entity takes to reclaim ownership of a property from a homeowner who is behind on their payments.

As mentioned, different states have their own specific rules for how these processes must proceed.

Foreclosure is a formal legal process that allows the entity to take possession of the property under certain conditions. It allows the entity to recover any outstanding debt the homeowner owes by taking title to the property and then selling the property to someone else. 

Differences between Mortgage Foreclosure and Property Tax Foreclosure

Mortgage foreclosure is a process that’s initiated by the lender when a homeowner fails to make timely repayments. There are various steps that the mortgage company must follow to formally foreclose on the property and take control of it.

Property tax foreclosure, meanwhile, is a statutory foreclosure process initiated by a local government to collect any unpaid property taxes. The government is able to place a lien on the property when homeowners don’t pay their taxes, which gives the entity the right to collect those taxes plus any associated penalties and interest.

If, in time, the homeowner still doesn’t pay, the government has the ability to foreclose on the property and then sell it at an auction to cover those unpaid taxes.

Foreclosure Types and Processes

There are two different types of foreclosure that a lender can initiate, and each follows a slightly different process. 

Judicial foreclosure involves the lender filing an official lawsuit in court to initiate the process. Some states mandate that judicial foreclosure be used.

Nonjudicial foreclosure, sometimes called foreclosure by advertisement, doesn’t involve the court system. There are 29 states that allow this type of foreclosure. This process can be quicker than judicial foreclosures, but there are still plenty of requirements the lender must meet.

Property Taxes

Along with the mortgage and interest, homeowners must pay property taxes — and most will pay them through their mortgage. This isn’t a requirement for everyone, though, so some people may opt to pay property taxes separately on a quarterly basis.

These taxes go to pay for things that local government entities provide, such as public schools, libraries, road repair and maintenance, trash and recycling collection and more.

What is Property Tax Foreclosure?

Property tax foreclosure is the process that local governments take to recover unpaid property taxes. If homeowners fail to pay their property taxes, the government that is owed the tax can file to take control of the property and sell it to make up for their lost money.

Tax Lien Sale vs. Tax Deed Sale

When homeowners don’t pay their property taxes, local governments place tax liens on the property. This gives them a legal claim to the property so that they can secure the payment of the taxes that are owed. In many states, this lien is given a “first-priority status,” which means it must be paid before all other debts, including the mortgage. In the State of Michigan, after the third year of unpaid property taxes, the County will initiate the tax foreclosure process. 

Governments then hold public auctions, and the winning bidder agrees to pay the money to enforce the tax lien. This allows the government to recoup its money.

A tax deed sale, by contrast, is held to actually sell a foreclosed home. The winner of this auction will actually take control of the home itself, rather than just the certificate to collect the outstanding taxes.

How Does the Foreclosure Process Proceed?

All foreclosures must start with official processes of notification by the entity — either the local government or the mortgage lender. How they proceed depends on what type of foreclosure it is and who is filing it.

 

Legal and Financial Implications

There are many legal and financial implications of foreclosure, including the fact that your home can be taken from you. You can lose any equity in the property you have acquired. Long-term, your credit score can be affected by a foreclosure significantly as well.

How Do I See If There Are Any Tax Liens on a Home?

Anyone can check for tax liens on a home through either the local courthouse, county assessor or county recorder known as the register of deeds. Sometimes, you can search these records online for a fee, submit the request by mail or even conduct the search in person at one of those offices.

Each local jurisdiction might have different offices that handle this task.

 

Intervention and Resolution Strategies

Just because foreclosure has been filed doesn’t mean that you will instantly lose your property. There may be multiple options during the process to intervene and pay off the outstanding debt to exit the foreclosure process depending upon the state you reside in. There are even some options for redeeming the property after it has already been sold at sheriff’s sale.

Can a Mortgage or Property Tax Foreclosure Be Stopped in the Same Way?

Each state has different rules for stopping the foreclosure process. Generally speaking, there are more options to stop a mortgage foreclosure. This could include simply paying what’s outstanding, or even modifying the loan to new terms that are amenable to both the borrower and the lender.

It’s a little more straightforward with property tax foreclosure. This can be prevented by coming to an agreement with the local government entity to pay whatever outstanding balance is due on the property taxes.

In either case, the filing of a bankruptcy proceeding would stop the foreclosure process in its tracks through the bankruptcy’s automatic stay provision.  

How Can I Buy a Home Subject to a Tax Sale?

Homes that are sold at a tax sale will be done so at public auctions. They will likely be advertised in local newspapers ahead of time, and then anyone can attend and bid on the property.

Working with a Professional to Resolve Property Tax Debt

There are many outlets for homeowners who are struggling to resolve outstanding property tax debt. One of the best ways is to hire a law firm such as Babi Legal that has years of experience in this area.

The expertise they can provide will be unmatched, and will give you the best chance to prevent your home from being foreclosed on and sold.

Financial Relief Programs and Options

There are many different financial relief programs and options for homeowners who are struggling to pay their mortgage and/or property taxes. Here are some of the most common ones.

Installment Agreement

Some government entities and mortgage companies will allow you to enter into an installment agreement to pay back your outstanding debt. This will allow you to set up a payment plan to pay the balance off over a set amount of time.

File for Bankruptcy

As a last result, you could file for bankruptcy to get some debt relief. This would work if you have other outstanding debts that you could get discharged, such as high credit card balances.

Lump Sum Payment / Redemption

If you have enough cash on hand, you can always exit the foreclosure process by making a lump sum payment of the amount of money you owe, this is known as a redemption. You even might be able to negotiate down the total amount you owe if you make one lump sum payment.

 

Choosing the Right Option for You

What is best for one person is not necessarily the best for someone else when it comes to dealing with foreclosure.

Assessing your financial situation and options

Working with an experienced law firm such as Babi Legal Group, you can assess your financial situation and the options you have to get out of foreclosure status, or to avoid it. By looking at your entire financial picture, you’ll be able to make a decision that’s smart for both now and over the long haul.

How to make informed decisions about foreclosure and debt settlement

There is no one right way to make a decision about foreclosure and debt settlement. That being said, it’s important to have an in-depth grasp on your overall financial situation, including your income, all the debts that you owe, your assets and what your outlook is.

Only then can you make a real informed decision about what would be best for you.

Bankruptcy can be a the best solution for individuals who have gotten themselves in a bad financial situation. Through the bankruptcy process, unsecured debts — and even some secured debts — can be discharged.

This allows people to start afresh on solid financial footing, rather than getting buried in mounds of debt with no end in sight. Of course, there are some downsides to filing for bankruptcy, including the immediate hit on your credit score that will come.

If you are also looking to apply for a mortgage, it’s important to understand that there will be a waiting period before you can apply for different types of loans. We’ll discuss that in more detail below.

Understanding the Waiting Period

Once you file for bankruptcy, there is a mandatory waiting period put in place by home lenders before you can apply for a new home loan. Each type of loan has a different waiting period, with conventional mortgages traditionally having the longest period. 

Why Is There a Waiting Period for Mortgages After Bankruptcy?

Lenders have put the waiting period in place to ensure that you didn’t use the bankruptcy process to get in a more favorable financial situation for a home loan. In addition, the lenders want to see that you have done the financial work necessary post-bankruptcy to afford a home loan.

How Long After Bankruptcy Can You Buy a House?

Technically speaking, you can buy a house immediately after you file bankruptcy. However, this isn’t a likely outcome, as most lenders will require the waiting period to get a new home mortgage. And if you had enough cash to purchase a home outright without a loan, you likely wouldn’t have needed to file bankruptcy in the first place.

Waiting Periods by Home Loan Type

The waiting period post-bankruptcy depends on two things — the type of bankruptcy protection you filed and the type of home loan you are seeking.

 

Bankruptcy and Mortgage Types

As mentioned, each different type of mortgage has a different waiting period post-bankruptcy. In addition, the waiting period also may differ depending on the type of bankruptcy you file.

Conventional Loan Waiting Period: 2–4 Years

Conventional loans have the longest waiting period. For Chapter 13 bankruptcy, the waiting period is two years from the discharge date or four years from dismissal.

For Chapter 7 bankruptcy, the waiting period is four years from the discharge date.

FHA Loan Waiting Period: 2 Years

FHA loans, backed by the Federal Housing Administration, have a shorter waiting period. For Chapter 13 bankruptcy, the waiting period is one year from the discharge date. For Chapter 7 bankruptcy, it’s two years from the discharge date.

USDA Loan Waiting Period: 3 Years

USDA loans, backed by the U.S. Department of Agriculture, have the same one-year waiting period from the discharge date for Chapter 13 bankruptcy, and three years from the discharge date for Chapter 7 bankruptcy.

VA Loan Waiting Period: 2 Years

VA loans, backed by the federal Department of Veterans Affairs, share the waiting period with FHA loans.

 

Post-Bankruptcy Financial Rehabilitation

The trade-off for the financial freedom that comes from bankruptcy is, of course, the hit to your credit score and the tightening of credit you’re likely to feel from different lenders. These restrictions, though, are only temporary. 

There are plenty of steps that you can take that will help you to re-establish a solid credit profile and get you on the right track.

Getting Your Finances and Credit in Shape

There are many things that you can do to get your finances and credit in shape following bankruptcy. First and foremost, make sure that you create and stick to a solid budget. This will help you to stay on top of your bills, set some money aside for savings and make sure that you don’t find yourself in the same financial position again.

Steps to Improve Your Credit Scores after Bankruptcy

The first step in improving your credit score after bankruptcy is to pay all of your bills on time. By not missing any payments, you’ll be ensuring that you aren’t making your situation worse than it already is.

At some point, it will be a good idea to try to open a credit card so that you can start building your credit. You may not be extended any offers for unsecured credit cards at first, so consider a secured credit card — which will require you to put up collateral, such as cash.

What Can I Do During the Waiting Period After I File Bankruptcy?

During the waiting period, it’s important to put yourself in the best financial position possible. Build your credit as aggressively as you can, put money aside for extra savings and for a down payment, and build a budget that works for you.

 

Credit and Mortgage Application Process

The mortgage application process post-bankruptcy will be the same as if you never filed bankruptcy. The lender will, of course, look at your entire financial and credit history, which will include your bankruptcy.

How Long After I File Bankruptcy Can I Apply for a Mortgage?

As mentioned above, different mortgage types have different waiting periods.

Minimum Credit Score Requirements

The minimum credit score requirements vary by mortgage type as well. Typically speaking, you will need a minimum credit score of 620 for a conventional loan. An FHA loan will require a credit score of 580 if you’re making a down payment of 3.5% or 500 if you’re making a 10% down payment.

While the VA doesn’t have a credit requirement, most lenders will require a credit score of 580 for this type of loan. The same goes for USDA loans, though many lenders will require a credit score of at least 640.

Importance of Credit Report in Mortgage Approval

Lenders will take a look at every aspect of your current financial status and past financial history to make a lending decision. 

 

Strategies for Mortgage Approval After Bankruptcy

Bankruptcy isn’t a death sentence for a future mortgage. There are things you can do to put yourself in a good position in time.

Tips to Improve Your Chances of Getting a Mortgage after Bankruptcy

Make sure that you increase your credit score by reducing debt and paying all your bills on time. Set and keep a good budget that includes extra money set aside for savings. And ensure that you establish a stable income.

Write a Letter of Explanation to Lenders

A good idea could be to write a letter of explanation to lenders. This gives you the opportunity to explain why you filed for bankruptcy, and the steps you have taken to change your financial situation in the time since.

Respond To Lender Inquiries

It’s always advisable to be on top of all lender inquiries. Don’t be afraid to talk about your bankruptcy and what you’ve done to put yourself in a better position since then.

 

Types of Mortgage Loans Post-Bankruptcy

There are many different types of mortgage loans you can get after a bankruptcy.

What Are FHA Loans?

FHA loans are backed by the Federal Housing Authority, which guarantees a large portion of the loan. They are offered through private lenders with the government’s backing. 

The minimum requirements to qualify are lower, including a down payment of as little as 3.5%.

What Are Conventional Loans?

Conventional loans are considered the gold standard of mortgages. They follow all standards of Freddie Mac and Fannie Mae. They typically have the most competitive interest rates and flexible repayment options. You’ll need a better interest rate to qualify, and will need to make a down payment of at least 20% to avoid paying monthly private mortgage insurance (PMI).

Understanding Different Mortgage Loan Options After Bankruptcy

It’s important to understand the different type of mortgage loan options you’ll have after bankruptcy. Which loans you will qualify for will depend on your current situation as well as that of the house.

For instance, to qualify for a VA loan, you must be a veteran or active duty military personnel, or be a spouse of one. To qualify for a USDA loan, your home must be located in what’s considered a rural part of the country.

 

Navigating Bankruptcy and Its Aftermath

Navigating bankruptcy can be difficult and challenging, but you don’t have to go it alone.

Is It Hard To Get New Credit After Bankruptcy?

Getting new credit after bankruptcy may be difficult at first, but after building up your credit by paying bills on time, it will get much easier.

Need Help Navigating the Bankruptcy Process?

You should never go into the bankruptcy process alone. It’s complicated, complex and can get quite expensive. That’s why you should always hire an experienced bankruptcy law firm such as Babi Legal to help you navigate the bankruptcy process.

Reset Your Finances

If you’ve found yourself in a bad financial situation, you can reset your finances by filing bankruptcy. To find out your options, contact Babi Legal today.