New Guidelines: Qualifying for a FHA Loan after a Foreclosure, Short Sale or Bankruptcy
During the years since the financial crisis of 2008, the role of FHA has expanded beyond its original mandate of providing affordable home financing alternatives to borrowers facing difficulties due to extenuating circumstances. The recent announcement issued in the HUD mortgagee letter (13-26) will allow borrowers to secure financing through FHA-insured loan programs just a year after facing a foreclosure, short sale or bankruptcy.
This major announcement, on the surface, may appear to be irresponsible, considering the lax lending policies that lead to recent mortgage crisis. While this new policy may sound like another benevolent federal program to reward irresponsible borrowers, there are a number of qualifying standards that prevent its abuse.
Severe Economic Event
To be eligible to secure FHA financing a year after facing a debilitating credit event, the borrower must demonstrate that they suffered from a significant “Economic Event”. Losing employment or a reduction in income are the two events that satisfy this condition.
For those previous homeowners that lost their homes due to the reduction of their incomes, it must be shown that the loss was at least 20% of income for a period of six months.
It’s not uncommon for a major portion of the workforce to experience income fluctuations that fall beyond the 20% threshold. In addition to full-time employees, even seasonal and part-time employees are allowed to qualify under the newly proposed guidelines.
The lenders are also required to perform additional checks and balances to ensure that a borrower’s credit suffered only because of the economic event, and their credit prior to that was satisfactory.
The borrower must also have taken measures to reestablish their credit since the loss of their home. A satisfactory credit for a minimum of 12 months prior to applying for a FHA loan is mandatory. Basically the credit report must not show any adverse credit actions or late payments related to any debt in the interim.
A minimum gap of 12 months must also be there since the date of the foreclosure, short sale or bankruptcy.
Homeownership Counseling and Education
Borrowers looking to qualify for a FHA loan after losing their prior home must have attended homeownership counseling and education in the ensuing period before seeking a FHA loan.
The homeownership counseling must be completed through an approved HUD housing counseling agency, and must be for a minimum duration of 1-hour. The counseling session should have addressed the causes of the Economic Event and also the necessary steps that must be taken to ensure its non recurrence.
The counseling session must be completed at least 30 days before applying for a FHA loan through an approved lender. At the same time, it should not be beyond six months prior to loan application.
The homeownership counseling session may be conducted in person, on the phone, or on the web.
Basically, a borrower can still qualify for a FHA loan just a year after losing a previous home to foreclosure, short sale or bankruptcy by satisfying the following conditions:
- Demonstrate that the adverse credit event occurred due to either the loss of employment or a severe reduction (>=20%) in income
- Satisfactory credit must have been re-established in the period since the loss of home. No late payments or negative credit incidents must be reflected in the credit report.
- A minimum of year must have lapsed before seeking a new FHA loan
- Should have completed a counseling session from a HUD-approved counseling agency
All in all, a great proposal from FHA to help new borrowers that lost their homes during the mortgage crisis due to unforeseen income losses.
Are you interested in finding out more about qualifying for a mortgage after a short sale, foreclosure or bankruptcy? Get started here and get matched up with a lender who can help you understand your options.