USDA approval with IIB defaulted mortgage

[Sweetpea3829]

Hi everyone...hoping somebody has been in a similar situation.

We have a mortgage that was IIB back in 2007. We have stayed and paid up until this past August when we let it go into default for a number of reasons.

The house has not foreclosed as of yet and we don't think the process has even begun other than receiving the NOD.

We are going to attempt to get a USDA Rural Development Loan to purchase a home in NY. We are relocating there from RI for a new job.

We are still receiving rental income from the house we still own here in RI. We have no legal liability to the loan for this house as it was IIB.

Do you think the USDA will approve our app, knowing that we have this loan, it's in default, and we have no intentions of bringing it out of default? Will they even care about this loan as it was IIB almost four years ago?

Any thoughts or ideas?

Are W2s mandatory to receive a Rural Development Loan? Or is there another way to substantiate income?

[TeacherMomma]

Are you looking at the Guaranteed or Direct?

[Sweetpea3829]

We qualify for both I think.

[Mark80]

I am in the same situation, well sort of. Discharged in CH7 and the house was let go during. Anyways I have been in contact with a few brokers and doing some research and found the USDA Rural Dev loan is the only shot I have right now. Unfortunately I am also running into some very strict lenders and have yet to find a place to secure one. =( I meet the income, credit score requirements but the actual BK mark is scaring them off. I am wondering how many years it will take before I get a chance, we are so tired of renting.

Let me know how it goes for you sweetpea, and if anyone knows the best way to apply or broker to use that has willing lenders I would appreciate it!

[Sweetpea3829]

Mark...you're going to want to go Direct with USDA. Depending on the circumstances surrounding your bankruptcy, they *may* make an exception but will most likely want you to wait until three years post bankruptcy before approval.

We're close with them...right now they're scared off by the fact that we're still receiving rental income from the property that was discharged almost four years ago, but not yet foreclosed. So we're working with the original lender to see about a deed in lieu (have to attempt a short sale first).

For you...in the meantime, make sure your credit is as clean as you can get it. If your scores are over 660 when you apply for a USDA Direct, you can streamline more quickly. Also, the handbook for underwriting guidelines for USDA is available online. Read it! I found at least two items in there that I can use to make my case for an exception. I hesitate to say it looks good...but I've been speaking with the Senior Loan advisor and she seems positive...again, her only concern was that we still have rental income coming in.

USDA lenders would not actually talk with us because of the presence of the property itself. As the loan has not been settled, they won't talk to us until it is, either by foreclosure, short sale, or deed in lieu. Even if we were current on the property, they would have balked, from what they tell me.

Good luck!!! Hope it works out for you!

[Mark80]

Thanks for the information, I was not aware you could get a loan directly? But three years will at least give me a more solid time frame to shoot for. One more year does not sound nearly as horrible as 3-4 more years!

I am going to make sure my credit stays good and only gets better in the mean time. Good Luck to you in your pursuit!

[tampagirl23]

Have you heard anything more on this? I am in about the same situation with a BK and a mortgage on my current home. I never reaffirmed it and it is in the foreclosure process now. Everything I have read on the USDA site says I should be able to get the loan. My credit score is around 650, I have 3 open trade-lines with no lates. i have talked to a few brokers but they all tell me 3 yrs. How do you talk to the lender or go directly to USDA?

[Sweetpea3829]

Tampa...we've had to go through a view different hoops to make this work out. And even still, we're not guaranteed to be approved.

What I did was I went to the USDA website (www.rurdev.usda.gov). I looked up the USDA offices that covered the area we are looking to move to. And I started emailing supervisors and directors our story.

Here's the kicker...initially I emailed a supervisor in one county office. After not hearing from her within two days, I emailed another supervisor in a different county office. It was the same exact email except I had included two specific parts of the USDA underwriting guidelines handbook that I felt were applicable to our case (things I hadn't been aware of prior). She forwarded my email to the Senior Loan specialist who I've been working with since. The SLS worked through the details with me and pointed out what she wanted addressed. She wanted to see the prequal app that I had already filled out. She also wanted a Tri-merge credit report. She absolutely wanted our names off the title for our property here as we cannot close with our names on another title. And she wants us to no longer collect rental income (because she felt that it put us too close to the income guidelines).

So we started to look into getting a deed-in-lieu. The lender said they would not do a DIL until the property was listed for 120 days. So we started to look into that. In the meantime, I kept reading here about people thinking of giving their properties back via quitclaim. Turns out, quitclaim won't work to give your property back to the bank. BUT....it DOES work to remove a spouse from the title (usually when divorcing and one spouse gives up claim to the property).

So I brought this information back to the SLS and asked if we could quitclaim my husband off the title, freeing him to apply for and close on a USDA loan. She indicated this should be sufficient. In the meantime, my name stays on the property until it's resolved.

I also dig more research on forcing a DIL and found that under HAFA, we should qualify for a waiver to the 120 listing requirement. Because we are relocating a far distance from the property and because we are unable to maintain the property, we should qualify for a DIL now. So I contacted the bank back and asked them to begin that process...they are sending paperwork out to me. Doesn't mean they will ultimately approve the DIL, but at least we're in the process of applying for one.

So that leaves the SLS with one last concern...the rental income. I'm not sweating the rental income because I've done the figures and we seem a few thousand under the income guidelines even with it added in. I'm going to attempt to proceed with the application with the rental income included, if the DIL takes too long to come back.

In the meantime...two days ago (almost two weeks after I sent the initial email), the first supervisor I had emailed finally got back to me. Now...remember, the emails I sent her and the second supervisor were nearly identical with the second email containing aspects of their underwriting guidelines that I felt applied to our situation. The first supervisor very bluntly stated that with the property in default we would not qualify for a USDA loan. She also stated that good credit is essential in getting a USDA loan. This is not true...they make many exceptions and their credit score threshold (660 mid score qualifies you for streamline underwriting) is hardly high enough to classify as "good" credit.

Bottom line...it all depends on who you talk to at the office. Now...I could very well go back to that first supervisor and point out the aspects of the underwriting handbook where she is incorrect to deny us even an application. But I'd rather leave well enough alone until we've closed on a property.

If one office tells you no...and if you have a compelling situation (and ours is pretty compelling because we can document how the bankruptcy was not a result of financial irresponsibility on our part), keep knocking on other doors. And research...research as much as you can. There's a lot of information out there.

I think reading the case studies here on the BK forum have been extremely helpful to me...I've gleaned much information from other people's stories. The quitclaim is a great example...I wouldn't have known of that possibility had it not been mentioned here. By quitclaiming, we should be able to close on a property by April instead of next Fall or winter, which is probably how long it would have taken to list for 120 days, then apply for the DIL, THEN apply for USDA approval...find a property and close.

Good luck, hope it works out for you as well! I'll update again when we either know more information that modifies or changes what I've already posted...or when we finally close...lol.

[doudis2]

So we started to look into getting a deed-in-lieu. The lender said they would not do a DIL until the property was listed for 120 days. So we started to look into that. In the meantime, I kept reading here about people thinking of giving their properties back via quitclaim. Turns out, quitclaim won't work to give your property back to the bank. BUT....it DOES work to remove a spouse from the title (usually when divorcing and one spouse gives up claim to the property).

So I brought this information back to the SLS and asked if we could quitclaim my husband off the title, freeing him to apply for and close on a USDA loan. She indicated this should be sufficient. In the meantime, my name stays on the property until it's resolved.

Hello,

I hope the quitclaim process works out for you, but I thought I would give my experience just as info to add to your arsenal.

When I divorced several years ago my ex of course insisted on having her name removed from the house. This is when I first heard of the quitclaim. So we started down that path but were shocked to learn that in order to get her name of the deed I had to refinance the home myself, into my own name.

You see no bank in their right mind is going to just let someone whose is financially responsible for a mortgage walk away with out a fight. So in the end I had to do the re-fi just to get her name off of the deed.

Hopefully my situation or state are different and things go more smoothly for you.

Best of luck!

[Sweetpea3829]

This is actually a really good point...it was mentioned to me that the quitclaim only takes my husband off the title...not the deed of trust. But as the mortgage was discharged, the deed of trust is a moot point. The SLA I've been working with at USDA indicated she would not consider his name on the deed as an issue. Having his name off the title is key for closing.

Now...all of this is "in theory." An underwriter has yet to actually sit down and go through this entire thing. I *hope* the SLA I've been working with has been running things by her underwriter. It would not be cool to find out that the underwriter won't proceed. I don't think it's going to be an issue though. I stressed to the SLA that we really wanted to make sure everything was clear now, before we even bother applying.

We'll know more in a few weeks...the SLA wants my husband to have several weeks of paycheck stubs before we apply. We've found a property that we really like so I hope it sticks around long enough.

[doudis2]

I agree having had the mortgage discharged changes things quite a bit from my situation and I'm thinking it should be the game changer in your favor.

As for losing the property you got you eye on; at least in this market the odds are most definitely in your favor for it still being available when your financing comes through. If nothing else, the price may continue to drop as many think that we still have not reached the bottom of this housing crisis.

I wish you both the best of luck, I'm pulling for ya!

[Sweetpea3829]

Hey thanks! And I hope everything works out for you as well! Let me tell you, almost four years ago when we had this bankruptcy discharged, we really thought it was the worst thing ever. It was just so devastating to even be in that situation. We resigned ourselves to being stuck with the property we have and never ever thought we'd be able to buy. At the time, we couldn't see ANY positives in what we were going through other than a good dose of humbleness, a lesson on not making assumptions on others (because it's easy to assume a person with a bankruptcy is financially irresponsible but that's not always the case), and the situation strengthened our marriage, our resolve to stick by one another no matter what and it drew us closer in our relationship with God.

Up until this past summer, we still maintained the thought that we would never be able to buy because we'd never be able to get out from under the multifamily we have. But because of what we went through in 2007, turns out, we ARE in a position to buy. And we wouldn't have been in this position had we not discharged the loan in that bankruptcy.

Now, I'm not saying God wants people to default on obligations...but I know for sure that He took a situation we had been in and used it for good and allowed these doors to open to us now.

We've been amazed at how He has orchestrated this entire situation, from the job to the USDA loan, to the fact that we were definite on our desire to purchase a specific property and had we not been declined by FHA, probably would have. Buying under FHA would have cost us a lot more than USDA.

In the end...it will all work out...sometimes not by how we think it should...but it WILL work out.

Good luck to you!!! I hope our situation is able to help somebody else get into a home sooner rather than later!