mortgage

Lender to reaffirm mortgage post-bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
We declared bankruptcy and tried to reaffirm our mortgage, but our mortgage company wouldn't allow it. How long before another financial institution will let us refinance our mortgage? Do we have to sell our home? Can the mortgage company take away our home if we are making the monthly payments? Are the monthly payments still going toward paying off the mortgage balance?
-- Barb

Dear Barb,
In some cases, lenders do not work with borrowers to reaffirm mortgage loans during the bankruptcy process. This causes problems for homeowners because the lender may also refuse to send monthly statements after the bankruptcy. But aside from some inconvenience, you still can keep your house as long as you make the monthly mortgage payments.

A reaffirmation agreement is a legally enforceable contract filed with the bankruptcy court that states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. You essentially are re-tying yourself to the terms of the loan, meaning that if you default or fail to pay it, you could wind up in foreclosure. By not reaffirming the loan but continuing to make payments, you are still paying off the loan but aren't held to the binding contract where you could be sued for the remaining balance if you fall into foreclosure.

In general, a lender wants you to reaffirm a loan when it can sue you for any remaining balance owed on your mortgage after foreclosing on the property. I believe there are two reasons lenders don't actively work with all borrowers to reaffirm a mortgage loan.

The first reason: Some states do not allow a lender to come after a homeowner following the foreclosure on the property to collect on a remaining balance owed. In those states, the lender may not want to spend the time and use resources to complete the reaffirmation paperwork, submit it to the court and follow up when it does not protect the lender's interest.

The second reason: Even if the lender in a particular state has the right to sue a borrower after foreclosing, the cost of staffing and managing reaffirmation agreements in all 50 states may not be worthwhile.

While your lender might not let you reaffirm the loan, you also do not have to sell the property and the mortgage lender cannot simply foreclose on your property because you failed to execute an agreement. The terms of your contract remain enforced: You make the mortgage payments, you keep your house.

Each month, your mortgage payment goes toward the principal and interest on the loan. Once you have made all your loan payments, you will be the owner of the property free and clear.

Refinancing the property is still an option. While lenders are definitely much more stringent refinancing mortgage loans, the bankruptcy will not hamper that process. You will just need sufficient equity in the property and monthly income for the lender to consider refinancing. Since you have a poor credit rating caused by the bankruptcy, equity and income will be the key to finding a lender willing to refinance your loan.

While I assume you want to refinance the property to take advantage of the low mortgage loan interest rates, you will need something more to offer before any new lender approves your application.

Yes, it is true that dealing with a mortgage loan after bankruptcy is more difficult than had you not filed at all. But you did file and will need to patiently work through any issues that arise. Just remind yourself that your goal is to keep your home.

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To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

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