Mortgage wrapped up in bankruptcy

[Anonymous]

I have a case where the homebuyer has a bankruptcy chapter 7 in 2013. Their first and second lien mortgages got caught in it. Discharged bk in 2013. They kept making home payments for the first mortgage. Neither were reaffirmed. He sold the home this past December, and it was not a foreclosure, transfer of deed in lieu or a short sale. He paid off both liens and was able to get money out of the sale. 

However, when trying to verify their mortgage history we are being told its protected under the bk, and that he was not obligated to pay the second lien. He may also have had some 30 day lates on the primary but nothing too bad that it would warrant a foreclosure. 

Is a verification of mortgage still needed if they were not obligated to pay it? 

[homeloanexpert]

I've run into this myself dozens of times over my career. It sounds like the AUS has given you an Refer/Eligible and unless you have a situation where the borrower was living rent free or can show at least a 12 month satisfactory rental or mortgage history, you are going to hit a brick wall. Were the late payments within the last 12 months? If not you're going to fine. If so, good luck!

[Anonymous]

So they rented out that home for 1.5 years till they closed on it in March. For those 1.5 years they were renting and making payments on it on time per their VOR for 18 months. AUS is running approve eligible but I was under the impression it was a manual downgrade if a mortgage does not show on there or if there are lates. They have 2 30 day lates in last 12 months. Is there something that can be done? 

[VALoanMaster]

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@Anonymous wrote:

I have a case where the homebuyer has a bankruptcy chapter 7 in 2013. Their first and second lien mortgages got caught in it. Discharged bk in 2013. They kept making home payments for the first mortgage. Neither were reaffirmed. He sold the home this past December, and it was not a foreclosure, transfer of deed in lieu or a short sale. He paid off both liens and was able to get money out of the sale. 

However, when trying to verify their mortgage history we are being told its protected under the bk, and that he was not obligated to pay the second lien. He may also have had some 30 day lates on the primary but nothing too bad that it would warrant a foreclosure. 

Is a verification of mortgage still needed if they were not obligated to pay it? 

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The short answer is yes, the VOM is required.

The long answer why.

Here are the FHA guidelines:

Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (TOTAL)

The Mortgagee must downgrade and manually underwrite any Mortgage that received an Accept recommendation if:

• the mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard;
• additional information, not considered in the AUS recommendation affects the overall insurability of the Mortgage;
• the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts;
• the date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is within two years from the date of case number assignment;
• the case number assignment date is within three years of the date of the transfer of title through a Pre-Foreclosure Sale (Short Sale);
• the case number assignment date is within three years of the date of the transfer of title through a foreclosure sale;
• the case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure;
• the Mortgage Payment history, for any mortgage trade line reported on the credit report used to score the application, requires a downgrade as defined in Housing Obligations/Mortgage Payment History; - see below:
• the Borrower has undisclosed mortgage debt that requires a downgrade; or
• business income shows a greater than 20 percent decline over the analysis period.

Housing Obligations/Mortgage Payment History (TOTAL)

1. Definition

Housing Obligation/Mortgage Payment refers to the monthly payment due for rental or Properties owned.

A Mortgage Payment is considered delinquent if not paid within the month due.

1. Late Mortgage Payments for Purchase and No Cash-Out Refinance

The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months reflects:

• three or more late payments of greater than 30 Days;
• one or more late payments of 60 Days plus one or more 30-Day late payments; or
• one payment greater than 90 Days late.

A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.

Undisclosed Mortgage Debt (TOTAL)

When an existing debt or obligation that is secured by a Mortgage but is not listed on the credit report and not considered by the AUS is revealed during the application process, the Mortgagee must obtain a verification of Mortgage directly from the Servicer. The Mortgage must be downgraded to a Refer and manually underwritten if the mortgage history reflects:

• a current delinquency;
• any delinquency within 12 months of the case number assignment date; or
• more than two 30 Day late payments within 24 months of the case number assignment date.

A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late Mortgage Payment.

[homeloanexpert]

I am telling you, I've had several deals like this and wasn't given a downgrade. They were absolved of the debt and you have an VOR as I understand it. This deal can get done.