FHA Makes it Easier to Get a Loan after Foreclosure
Waiting Period for a FHA Loan After Foreclosure
Getting a mortgage after going through a foreclosure, bankruptcy, short sale, or deed in lieu of foreclosure is not easy. Not only is your credit score hurt, but lenders have waiting periods between 2-7 years.
In general, FHA mortgage loans are designed to help borrowers with weaker credit. For example the minimum required credit score for a FHA loan with only a 3.5% down-payment is 580. (Lenders often have stricter requirements). The FHA waiting period for a loan after foreclosure or other events is shorter than other loan programs.
Here are the FHA mortgage loans for normal circumstances:
|Derogatory Event||Waiting Period|
|Foreclosure & Deed-in-Lieu of Foreclosure||3 years|
|Bankruptcy - Chapter 7 or 11||2 years|
|Bankruptcy - Chapter 13||2 years|
|Short Sale||1-3 years|
(For more detailed information read Bills.com article about mortgages after foreclosure and other events for more detailed information, including other loan programs).
Exceptions to Waiting Periods and FHA's Back to Work Rule
Just like other lending programs (the VA, Fannie Mae and Freddie Mac), the FHA has exceptions to their waiting periods. The FHA’s rules allow for a shorter period – in general a 12 month period - if the borrower can prove that there were Extenuating Circumstances.
Two reasons that the FHA allowed borrowers to qualify for a home loan without waiting the full period, were:
- The death of the principal wage earner, or
- A serious long-term uninsured illness
Job and Income Loss: The FHA added a third exception with their new Back to Work rule that will make it easier for many borrowers to get a mortgage sooner. Many households went through very difficult economic times during the post-2007 Great Recession. A combination of losing jobs and/or income together with the huge drop in housing prices led to foreclosures, deed in lieu of foreclosures, short sales or bankruptcies. The rule goes into effect September 1, 2013 for a three year period.
Suffering an Economic Difficulty: The new FHA Back to Work rule now allows borrowers to qualify for a FHA mortgage loan sooner, as long as they can prove that they:
- They suffered an economic difficulty beyond their control.
- The difficulty resulted in a Loss of Employment, Loss of Income, or a combination of both.
- The loss of the borrower’s Household Income was at least 20% for more than six month.
Satisfactory Credit: As a condition to qualify for the earlier period, the borrower must be able to show that they are past the crisis and handling their financial situation responsibly. You must be able to show that you have satisfactory credit including:
- No late housing or installment debt payments
- Open mortgage is current with 12 months of on-time payments. (That includes borrowers who did loan modifications and meet their required monthly payments).
- No collection items.
Qualifying for a FHA Mortgage under the Back to Work Program
In order to qualify for a mortgage after foreclosure, bankruptcy, or any foreclosure prevention program you will need to show the lender that you have the capability to repay the loan, including:
- Sufficient and Steady Income
- A sufficient down-payment and cash reserves
- Debt to Income ratio that does not exceed 31% for your household expenses and 43% for your total debt payments.
In addition the FHA Back to Work program requires that you show proof of the economic crisis that lead to job loss and/or significant drop in income. This would include showing W-2 statements, job termination notices, and any other relevant documentation that your lender will require.
The FHA also requires all borrowers in the program to go through a HUD approved housing counseling program.
Here are some steps to help you prepare:
- Check your credit report and make sure that you don't have any late payments for the last 12 months.
- Make sure that you don't have any collection items.
- Put together your documents showing your job loss and/or your loss of income.
- Learn more about FHA loans and FHA mortgage insurance.
- Speak to a lender and Get pre-approved for a loan.
- Learn about mortgage rates today