FHA Changes-Some buyers can now qualify 12 mos after Foreclosure or BK.
Lost your job and lost your home or filed bankruptcy?FHA says you are not completely out of luck.
FHA guidelines on Foreclosures, Bankruptcy and short sales have up to now not accepted loss of job or income as an extenuating circumstance when trying to qualify for a loan before the standard waiting periods.
In a change released on Aug 15th, HUD will now allow some buyers to qualify 12 months after a foreclosure, short sale or bankruptcy if it was caused by a loss of a job or reduction in household income.
FHA requires the following waiting periods after certain derogatory credit.
Foreclosure: FHA generally requires that at least 3 years pass after a foreclosure before a buyer is eligible for an FHA Loan.
Short Sale: A buyer is eligible for an FHA mortgage 3 years after a short sale. If the mortgage was current and had no lates during the 12 months prior to the short sale, a buyer is eligible for FHA financing immediately
Bankruptcy:A buyer with a Chapter 7 Bankruptcy will generally need to wait 2 years after the discharge before he/she is eligible for an FHA Loan. A buyer with a Chapter 13 Bankruptcy is eligible for an FHA Loan 12 months after the filing of the bankruptcy provided that they have made their payments to the court on time and that the court give written permission to obtain the loan.
These waiting periods can be reduced if the Foreclosure, Bankruptcy or Short Sale took place due to circumstances beyond the borrower’s control. Up until now, loss of income due to a job loss or divorce was not considered as an extenuating circumstances.
Mortgage Letter 13-26 addressed the issue of financial hardships caused by the recent recession. Borrowers that may have otherwise been ineligible for an FHA insured loan due to the waiting periods listed above may now be eligible for an FHA loan if the borrower experienced what they are referring to as an Economic Event and they can document that:
- Credit delinquencies were the result of the loss of employment or significant loss of household income beyond the borrowe’s control.
- The borrower has demonstrated full recovery from the event AND
- The borrower has completed housing counseling
- Borrower meets all other FHA guidelines
The borrower will need to show that they had satisfactory credit prior to the onset of the Economic Event* and that the derogatory credit took place after the Economic Event Onset. They will also need to show that they have re-established satisfactory credit for a minimum of 12 months.
If the borrower can meet the requirements as outlined in the mortgage letter, then the following watiing periods will apply
Foreclosure– a minimum of 12 months from the date of foreclosure or deed-in lieu of
Short Sale – a minimum of 12 months from the date of sale regardless of the status of the loan at the time of closing
Bankruptcy – 12 months from the date of discharge
These changes will open up possibilities to those buyers, who like many of us, were affected by the slowing economy and recent recession. it never did make sense to me that the loss of a job would not be considered an extenuating circumstance. To me that seems to be the ultimate even that is out of one’s control and is at the core of the inability to meet financial obligations
Please contact me for additional information on this or any other FHA guideline.
*An Economic Event is any occurrence beyond the borrower’s control that results in Loss of employment, loss of income or a combination of both which causes a reduction int he borrower’s household income of 20% or more for a period of at least six months. The Onset of an Economic Event is the month of the loss of employment/income. A written verification of Employment (VOE) evidencing the termination date or a written termination notice will be required along with verification of the household income prior to the loss of job/income