Federal Housing Administration (FHA) mortgages are now available to select borrowers only one year after a foreclosure, slashing the previous three-year waiting time by 66 percent. The deal isn’t available to all borrowers and it is tough to qualify after only one year, but the new provision is a major shift away from FHA’s recent restrictions.
The U.S. Department of Housing and Urban Development’s (HUD) issued Mortgagee Letter 2013-26 – Back to Work-Extenuating Circumstances, saying “As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes…FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”
The new provision allows borrowers who’ve had a foreclosure, short sale, deed-in-lieu sale or bankruptcy become a homeowner again in as little as 12 months.
Qualifying Under the Back to Work Plan
To qualify borrowers must:
- Document that “certain credit impairments” resulted from a job loss or income loss beyond the borrower’s control. Income loss must be at least 20 percent for at least six months.
- Complete housing counseling through a HUD-certified counselor.
- Reestablish “satisfactory credit” for at least 12 months prior to the application for a mortgage. Satisfactory credit means no 30-day late payments for housing (rent or mortgage) or installment accounts, and no serious delinquency for any other accounts.
The letter says housing counseling is a key home buying tool for any home buyer. It helps borrowers better understand loan options and obligations, and assists them with creating and assessing a household budget, and helps them obtain reliable information and resources, avoid scams, and be better prepared for future financial shocks.
The new provision took effect Aug. 15, 2013, runs through Sept. 30, 2016 and includes purchase money mortgages in all FHA programs except of Home Equity Conversion Mortgages.
FHA Loans After Just 1 Year!?
While the new provision is a good deal, the reality is it will be tough to qualify for a new mortgage one year after a foreclosure, short sale, etc.
Hardships don’t typically occur overnight. Righting the financial ship after a storm likely also won’t happen overnight. In order to qualify within one year, you’d have to begin making payments on time starting the very day you lose your home or discharge your bankruptcy. In reality. the plan may reduce the three-year period by only a little . Of course anything shorter than three years will make buyers happy.
In addition, the program *allows* lenders to approve mortgages under its guidelines. It doesn’t *require* them to. So mortgage lenders can continue to require longer waiting periods or better credit profiles before granting FHA mortgages to folks with iffy credit profiles.
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