FHA Review Decision

[Ann]

I received my decision today regarding a possible FHA loan after a chapter 7 and a second mortgage settlement. The answer from my broker was no. She said FHA is viewing the settlement we made to our second mortgage company as a short sale/foreclosure! In their response they said had we been up to date on our payments to the mortgage company like we were with our first, this would not be an issue!

When my broker asked if they were using the actual discharge date which will be 3 years this summer (since they are viewing it as a foreclosure) as the 3 year mark or the settlement date (which is in October) they said the settlement date. They kept using the words "past due" payment and "debt owed" in their letter. Is FHA aware that when you are discharged in a chapter 7 all the "debt owed" is no longer there?

My broker is not happy and needless to say neither am I. She feels they are looking too closely at the second mortgage being settled as a way to deny us. I feel the same way. If I were current with my payments there would have never been a settlement. I feel they are not looking at it in a legal way. The law states I am no longer obligated to make payments but somehow FHA sees it differently.

I will keep you posted if anything else comes up. I doubt we will be able to make them see things the way they really are!

[Logan]

When my broker asked if they were using the actual discharge date which will be 3 years this summer (since they are viewing it as a foreclosure) as the 3 year mark or the settlement date (which is in October) they said the settlement date. They kept using the words "past due" payment and "debt owed" in their letter. Is FHA aware that when you are discharged in a chapter 7 all the "debt owed" is no longer there?

The law states I am no longer obligated to make payments but somehow FHA sees it differently.

The law has no bearing on whether or not you qualify for a loan. In this case they consider the discharge of your 2nd mortgage to be the same as a foreclosure and as with a true foreclosure that date starts on the 'settlement date' regardless of your payment history. This decision does not surprise me at all but it is also possible that a different underwriter has a different interpretation but I think it would be tough to find one.
IMO you should move on and make a life/financial plan knowing you will not get a mortgage until that 3 year mark arrives.

Good Luck

[Ann]

Logan: Thanks for replying but in your statement above you say that "as with a true foreclosure that date starts on the settlement date regardless of your payment history". Well, actually that is not what FHA is saying. When questioned by my broker why they came to this decision they said "if the borrowers had been current on making payments on the second like they were with the first this would not even be an issue and a go ahead would be given to proceed with the loan". So they are saying if I continued to make payments they would have approved the loan (even though we all know you would almost never get a settlement out of a mortgage that is current) so instead of no payments its a foreclosure even though no proceedings have or will take place.

Ive been thinking about this and would it not make more sense for me to just go ahead and apply for a conventional mortgage next year which would be 4 years since a discharge? Even if they also view the second as a short sale from everything I've read online my time line would be next year. I will most certainly have the 20% down which I believe is what is required after a short sale after 2 or 3 years and the bankruptcy after 4. Seems to me maybe I won't need FHA after all.

[justbroke]

FHA is very particular in this area and this is why I constantly advise people to seek full underwriting before looking for a home to purchase post bankruptcy. The key here is that every FHA underwriting scenario that I have read, where a mortgage (superior or inferior) was discharged, the FHA would view that as a foreclosure/short sale. A mitigating factor can be applied where the debtor continued to pay the mortgage after the discharge.

I know it gets complicated and then people wonder whether it's 2 years or 3 years or 4 years and what is the trigger date.

As for "amount owed" and "past due", please realize that a bankruptcy only removes your legal liability to pay a particular debt. It does not remove the fact that you owe a particular creditor money. The discharge just bars the creditor from collecting from you personally.

[Logan]

Logan: When questioned by my broker why they came to this decision they said "if the borrowers had been current on making payments on the second like they were with the first this would not even be an issue and a go ahead would be given to proceed with the loan". So they are saying if I continued to make payments they would have approved the loan (even though we all know you would almost never get a settlement out of a mortgage that is current) so instead of no payments its a foreclosure even though no proceedings have or will take place.

Your mortgage broker may have said that but how do you have a foreclosure without missing payments? If you were paying your 2nd mortgage on time would it have been discharged?

[Logan]

FHA is very particular in this area and this is why I constantly advise people to seek full underwriting before looking for a home to purchase post bankruptcy. The key here is that every FHA underwriting scenario that I have read, where a mortgage (superior or inferior) was discharged, the FHA would view that as a foreclosure/short sale. A mitigating factor can be applied where the debtor continued to pay the mortgage after the discharge.

As I said/asked in the above post, how can you have a foreclosure if you are making payments?
Logan

[justbroke]

As I said/asked in the above post, how can you have a foreclosure if you are making payments?

It's not a foreclosure by definition. However, non-payment of a discharged mortgage is "considered" to be a foreclosure for those the purpose of underwriting. If you were not paying your 2nd mortgage, you can't use the fact that you were paying the first mortgage as a "extenuating circumstance" to have them override the guidelines when it comes to bankruptcy.

Remember, they are guidelines, not rules. The hard rule, however, is that the lender is going to take the most strict interpretation. The lender is trying to make sure that the loan fits the FHA guidelines and that the loan will be "guaranteed" by the federal government (under FHA). This is why the FHA allows the lender to add in additional seasoning. No lender wants a non-performing loan portfolio.

[Logan]

It's not a foreclosure by definition. However, non-payment of a discharged mortgage is "considered" to be a foreclosure for those the purpose of underwriting. If you were not paying your 2nd mortgage, you can't use the fact that you were paying the first mortgage as a "extenuating circumstance" to have them override the guidelines when it comes to bankruptcy.

My point is the underwriter said if the payments were continued on the 2nd mortgage then the OP would have been approved. But what I'm saying is if the payments were being made on the 2nd then the 2nd mortgage would not have been 'settled'.

Logan

[justbroke]

My point is the underwriter said if the payments were continued on the 2nd mortgage then the OP would have been approved. But what I'm saying is if the payments were being made on the 2nd then the 2nd mortgage would not have been 'settled'.

Settling any debt for less than the amount owed, is usually considered, for credit purposes, a default and typically have a negative credit impact. Mortgage lenders, and underwriters, do not like to see that a mortgage lender had a loss. That they treat a loss to a lender, as a "short sale", and that the "short sale" is considered to be no different than a foreclosure, is just their guideline (or rule) to factor in that a "negative" mortgage exists. (Yes, it is "negative" account because it was settled (reduced), even if you were paying on time.)

A negotiated reduction in a mortgage balance is still a negative payment history. The implication is that you do not pay all that you owe.