Mortgage Reaffirmation after Bankruptcy

by Stan in Illinois and by John in Milwaukee, WI

Is mortgage reaffirmation after a bankruptcy discharge necessary for a HARP refinance? Stan's lender says he must reaffirm his current home loan to be approved for the Making Home Affordable Refinance Program. John hasn't missed a house payment in 9 years since his bankruptcy but his lender is balking because the mortgage has never been reaffirmed.


Question 1: Is Mortgage Reaffirmation Required for HARP?

By Stan from Illinois

Kate, Do I have to reaffirm my mortgage after bankruptcy to qualify for a refinance thru HARP?

What if I don't want to reaffirm my loan? Then what? Can I get a different lender to work with me? I have a 1st and 2nd mortgage thru the same bank and it is a Fannie May loan.

Ask Kate at Get-Your-Best-Mortgage-Rate.com

Ask Kate answers: Is Mortgage Reaffirmation Required for HARP?

Hi Stan,

I'm getting a number of letters asking if qualifying for HARP refinancing is dependent upon reaffirming a mortgage after bankruptcy.

The questions were confusing to me because I was not aware that attorneys had begun advising against reaffirmation. See my answer to Rhonda at Is Refinancing Under HARP 2 Program Possible with Past Bankruptcy.

Of course, I am not an attorney. So I cannot advise whether not reaffirming a mortgage is a good move. But I can give you some background and food for thought.

What is reaffirmation of a mortgage after bankruptcy?

Firstly, when a mortgage loan is included in a bankruptcy, it does not mean the homeowner magically owns their property free and clear. On the contrary, it will eventually go through foreclosure to be owned by the bank and resold, often for less than is owed.

But in general, the homeowner will not be liable for the remaining mortgage balance (called a deficiency judgement) after the home is sold by the bank.

But let's say the homeowner reaffirms their loan after a BK and resumes mortgage payments. The home does not proceed to foreclosure. Supposedly (and it may well), the act of credit rebuilding commences when the bank reports timely payments to major credit reporting agencies.

How does it work without a reaffirmation?

Well, obviously if no payments are made, the home proceeds to foreclosure and the borrower falls under the protection of bankruptcy laws.

But let's say the homeowner chooses not to reaffirm the mortgage but does resume payments. Generally speaking, many lenders would be happy to accept the mortgage payments and leave well enough alone. But I'd caution everyone to read their mortgage contract and consult an attorney before taking this path.

Why do some attorneys advise against reaffirmation?

Ask Kate about refinancing after bankruptcy

In the days of rapid equity building, borrowers were quick to reaffirm mortgages. It signaled their intention to keep the terms and conditions of lenders' contracts.

In common terms, reaffirmation removed the mortgage from the bankruptcy, saved the home, and initiated credit rebuilding, assuming payments were timely.

But with the number of underwater mortgages and unemployed homeowners, the tide has turned. By reaffirming a mortgage after the bankruptcy is discharged, the homeowner is once again personally liable for the mortgage balance, should another crisis occur.

Let's say a job is lost, a child falls ill. House payments cease for months on end. Protection from a deficiency judgement that bankruptcy once provided is over since the mortgage was reaffirmed. The homeowner could be personally liable for the unpaid mortgage balance when the bank sells the house after the foreclosure process.

Why are lenders requiring reaffirmation before approving a HARP refinance?

At this juncture, your lender's motivation is probably clear. They wish to see you back on the hook for the terms and conditions of your loan. So they play hardball, not approving your HARP refinance until you've reaffirmed.

What choices do homeowners have?

Because the lender, Fannie Mae, or Freddie Mac control the money, they can call the shots on your refinance requirements. Play by their rules to get the lowest interest rates in centuries. Refuse to reaffirm and you strike out.

But state laws governing consumer protection vary across the nation. So for the complete picture, consult a bankruptcy attorney in your specific state to learn your individual rights.

I almost forgot. What if you decide to try another lender, hoping for a different outcome? If you succeed, will you please be kind enough to add a comment here? Everyone will benefit. You can also use the commenting function to ask further questions.

Wishing you all the best for your HARP refinance,

Ask Kate

Question 2: HARP and Reaffirmation

By John from Milwaukee, WI

Hi Kate, Is it possible to refinance through HARP even though I didn't reaffirm my mortgage? I haven't had any success refinancing because my lender doesn't "see" my mortgage on my credit report. I have not missed a payment in over 9 years. Thanks!

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Ask Kate answers: HARP and Reaffirmation

Hi John,

When a homeowner decides against reaffirmation after the bankruptcy discharge, the lender is not obligated to report their payment history.

So I can understand a credit agency saying they don't see any recent mortgage history.

But it seems silly for your lender to claim the same when they've been cashing your checks every 30 days for 9 years.

By the way, that adds up to 108 payments. Perhaps your lender needs glasses to see more clearly. Even so, let's say we play their game.

Once a year, mortgage lenders are required to provide borrowers an accounting statement. Send copies of the annual statement to the credit agencies and ask for the data to be reflected in your history. You can find contact information for the 3 largest credit bureaus here.

But keep in mind, without reaffirmation, you have not agreed to the terms and conditions to repayment which means you could walk away from the house under the protection of bankruptcy laws. So assuming a lender will be okay with this to the point of refinancing your mortgage is probably unrealistic.

But as I told Stan, there is no substitute for consulting an attorney in your state who specializes in bankruptcy and foreclosure protection to homeowners. I can give you food for thought but an attorney can counsel you according to law.

Best wishes,

Ask Kate


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Refinancing after Bankruptcy and Reaffirming my Mortgage
by: Brenda from Madera

Four years ago, I filed and was granted chapter 7. I was never late nor missed any loan payments and have continued to pay my loan.

I have read that without reaffirming, I have no legal obligation if I should walk away in the future.

Bank of America recently sold my mortgage to another company and they want to refinance my loan.

Would this be a good idea or should I stay the way it is now? My current interest rate is a 5.875%. They say if I refinance, it would be at 4.685% for 30 years. (I currently have 21 years left and my current payment is $1066 a month without taxes or insurance.) My current credit score is 649. Thank you in advance for your answer.

Hi Brenda, Kate here...

First read my answers to Stan and John about mortgage reaffirmation after bankruptcy as well as the comments below. Then you'll have to decide if the benefits of refinancing will outweigh the risk of a deficiency judgement should you not be able to make your house payment.

It's a tricky decision, isn't it?

I also think it would be prudent to consult an attorney for the pros and cons of refinancing your mortgage after bankruptcy before taking action.

Best wishes, Kate

Is Mortgage Reaffirmation after Bankruptcy Legal or Not
by: Anonymous

I was told by my attorney it was illegal to affirm after a bankruptcy in the state of Nevada. Is that true?

Hi Kate here...

The best way I know to confirm what one attorney advises is by getting second opinions from other attorneys.

Best wishes, Kate

To reaffirm my mortgage or not?
by: Stan

Kate, thanks for you answers I had a couple follow up questions. 1) My lawyer would like it in writing from the bank that once we reaffirm the loan that they will approve the refinance. The bank is not agreeing to this. So I'm not sure if I should take the risk. 2) But if I do that can they refinance the 1st and 2nd loans together?

Hi Stan, Kate here.

1) While I agree with your attorney, I doubt the bank will comply as they actually do not approve a mortgage without conditions until funding and recording have occurred. Even then, you might see fine print that reserves the right to call back a loan after recording.

But how about this? Ask the bank to make loan reaffirmation a condition at closing. In other words, your new HARP mortgage will not be able to close without simultaneously reaffirming your current home loan. It doesn't remove your risk entirely so run it past your attorney for a thumbs up or down before asking the lender.

2) Sorry to report but HARP does not refinance 2nd mortgages. See Tara's question at Rolling First and Second Mortgages into HARP Loan. Then keep reading down the same page for solutions from Making Home Affordable for 2nd mortgages, Subordination and HAMP's Second Lien Modification Program (2MP).

Thanks so much for your questions. If this does not clarify adequately, please ask again.

Best wishes, Kate

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The information you obtain at this site is not, nor is it intended to be, a substitute for financial, real estate or legal advice. You should consult an attorney, accountant, lender or real estate agent, as applicable, for advice regarding your individual situation. Comments and opinions found here are not necessarily those of Get-Your-Best-Mortgage-Rate.com

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