Getting an FHA Loan After Foreclosure or Bankruptcy

New FHA guidelines mean you might be able to get an FHA mortgage one year after a bankruptcy, foreclosure, or short sale.

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If you have gone through a foreclosure, short sale, bankruptcy, or deed in lieu of foreclosure, you can get a new FHA mortgage loan after waiting as little as one year, if you meet certain criteria. Read on to learn more about FHA loans and find out if you might qualify for a FHA mortgage under this new program.

(To learn more about foreclosure, short sales, or deeds in lieu of foreclosure, visit our Foreclosure section and our Alternatives to Foreclosure area.)

(To learn more about bankruptcy, including bankruptcy basics, bankruptcy procedures, and specific information about filing bankruptcy in your state, visit our Bankruptcy area.)

Federal Housing Administration (FHA) Loans

The Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD), insures lenders against some of the risk involved in lending to borrowers who often don't qualify for conventional home loans, including first-time homebuyers or those with low or moderate incomes. The loan itself comes from your lender, not the FHA.

Previously, borrowers were generally ineligible for a new FHA loan until three years after a foreclosure, short sale, or deed in lieu of foreclosure and two years after a Chapter 7 bankruptcy, though the death of a spouse or a medical emergency could cut the wait time to one year.

FHA’s “Back to Work – Extenuating Circumstances” Program

During the recent recession, many borrowers experienced unemployment or other severe reductions in income and ultimately lost their homes. In many cases, this was a one-time hardship due to the recession, not a pattern of bad financial decisions. The FHA wants to make it easier for those people to get a new home loan with FHA backing since their credit histories may not fully reflect their true ability to repay a mortgage.

As a result, the FHA recently changed its mortgage rules so that some borrowers can qualify for a new FHA loan just one year after a foreclosure, short sale, deed in lieu of foreclosure, or bankruptcy as part of its new Back to Work – Extenuating Circumstances program.

Effective Date of the Program

The new extenuating circumstances policy will remain in place for three years, from August 15, 2013 through September 30, 2016.

Qualifying for a New FHA Loan Under this Program

The FHA reduced the waiting period to one year if you can show you went through a foreclosure, short sale, bankruptcy, or deed in lieu of foreclosure due to an external economic event, like a loss of income or employment (or a combination of both) through no fault of your own.

To be eligible, you must prove that you are back on track financially, which means meeting all of the following criteria.

  • You experienced a major economic event such as a job loss or severe reduction in income of 20% for at least six months, which was the main reason you lost your home.
  • You can demonstrate that you have since fully recovered. To do this, you must show that you are employed and able to afford loan payments once again.
  • Your credit score was satisfactory before the economic event with no late payments or other major derogatory credit issues.
  • Your credit score must be satisfactory for the past 12 months. (This means no late rent payments, no more than one 30-day delinquency on payments due to other creditors, and no collection accounts/court records reporting other than medical and/or identity theft).
  • You must complete a one-hour (minimum) one-on-one housing counseling session with a HUD-approved housing counseling agency. The counseling must address the cause of the economic event, as well as the actions taken to overcome the economic event and reduce the likelihood of re-occurrence. It must be completed a minimum of 30 days, but no more than 6 months, prior to submitting a loan application to a lender and can be done in person, via telephone, via internet, or other methods approved by HUD. A list of counseling agencies can be obtained online at www.hud.gov or by calling 800-569-4287.

If you meet these requirements, you may qualify for an FHA loan, which allows you to put down as little as 3.5% on a mortgage.

Ultimately, the Lender Still Makes the Final Call

Keep in mind though that, even with these new rules in place, whether a particular borrower actually gets financing is ultimately up to the lender. While the FHA rules may say lenders can provide the loan, individual lenders may have significantly stricter standards than the FHA.

For More Information

To learn more about this FHA program, go to www.hud.gov. Type “Back to Work” in the search box. Then click on the link in the list of results called “Mortgagee – HUD” and go to Document Number 13-26 called “Back to Work – Extenuating Circumstances” to download a PDF about the program.

by: , Contributing Editor

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