If your Buyer/Borrower has a mortgage loan that was included in a Chapter 7 Bankruptcy, make sure to ask whether that mortgage was ever Reaffirmed with the lender.
Many Buyer/Borrowers rolled their mortgage loan into a Chapter 7 bankruptcy, but continued to pay on the mortgage on-time, and live in the home. Whether the loan has ever been Reaffirmed, may influence their ability to use certain lenders in the future for a new loan. It may also affect the way the mortgage is reported on the credit report and how the Buyer/Borrower’s credit is evaluated by the Underwriter.
Some background: When a Buyer/Borrower files a Chapter 7 bankruptcy and includes the Mortgage, when the Chapter 7 bankruptcy is discharged, so is the Buyer/Borrower’s obligation to repay the debt. While not a guarantee, typically, if the loan is paid on-time and as agreed, the Buyer/Borrower can stay and live in the home. Should they choose not to pay the loan, this will result in Foreclosure.
A Reaffirmation Agreement is a legally enforceable contract, filed with the Bankruptcy Court. Essentially, even though the Mortgage was discharged in the Bankruptcy and the Buyer/Borrower’s wages and personal non-real estate assets are no longer at risk, a Reaffirmation Agreement re-obligates the Buyer/Borrower to repay all or part of the mortgage debt.
Pros: By Reaffirming the Mortgage, the lender will continue to report the good payment history to the credit agencies. This is important to many future lenders that may be evaluating a new mortgage loan for the Buyer/Borrower. It is important for the Mortgage Loan Professional and Real Estate Professional to know whether the loan which was included in the Bankruptcy was Reaffirmed, so that any new loan can be structured properly with the correct lender, at the beginning.
Cons: By signing a Reaffirmation Agreement, a Buyer/Borrower assumes greater liability in the event of foreclosure. As mentioned, the Chapter 7 Bankruptcy discharges the Buyer/Borrower’s responsibility for repaying the debt – thus their wages and personal assets are no longer at risk, if the home is foreclosed on in the future.
Recommendation: Always ask about any mortgage loan included in a Chapter 7 Bankruptcy, to determine whether the loan was Reaffirmed. The answer will help you structure the next mortgage loan with the correct lender, and increase your ability to successfully close the mortgage and real estate transaction.
