This BLOG On FHA Guidelines After Bankruptcy And Foreclosure For Borrowers Was Written By Gustan Cho NMLS 873293
HUD has launched FHA Back to Work Extenuating Circumstances due to an economic event and it turned out to be a flop where very few if any, lenders closed on any of these loans.
- On August 15, 2013, the United States Department of Housing and Urban Development, the parent to the Federal Housing Administration ( FHA ), has launched the FHA Back to Work Extenuating Circumstances due to an economic event
- This loan program shortened the waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale to a one-year waiting period.
- Since the program has launched, thousands of homebuyers who qualified took advantage of the FHA Back to Work Mortgage
- They were under the belief and dream of becoming homeowners without waiting the two-year waiting period after bankruptcy discharge
- The three years waiting period after foreclosure, deed in lieu of foreclosure, and the short sale was shortened to one year
- Out of the countless borrowers who applied, only a minute fraction got a clear to close and closed on their FHA Loan with the Back To Work Program.
- FHA has announced that the FHA Back to Work Extenuating Circumstances due to an economic event will continue for 2015
But those who met FHA Guidelines After Bankruptcy And Foreclosure never got a chance to get approved and close on their FHA Loans with the Back To Work.
Qualifying For FHA Loans After Bankruptcy And Foreclosure
Not everyone qualified for the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program.
- To be eligible for the FHA Back to Work Mortgage, the mortgage loan applicant needs to have been involuntarily terminated by his or her previous employer or the previous employer needs to have closed its doors or shut their branch operations
- This need to have caused the involuntary unemployment of borrowers
- Due to the involuntary unemployment, borrowers were forced to either file bankruptcy and/or go through a foreclosure, deed in lieu of foreclosure, or short sale due
- Due to the housing event and/or bankruptcy, borrowers had to sustain a 20% reduction of their household income for at least six months.
- A 20% reduction of household income is calculated and required
- Unemployment income does not count as income
- Unemployment income will not apply in calculating the 20% reduction of household income
The Back To Work Mortgage turned out to be a complete disaster where most lenders ended up discontinuing the program altogether before the program expired.
HUD FHA Guidelines After Bankruptcy And Foreclosure
HUD has very lenient requirements for homebuyers to qualify for FHA Loans after bankruptcy and foreclosure. Here are the updated FHA Guidelines After Bankruptcy And Foreclosure:
- 2 year waiting period after Chapter 7 Bankruptcy discharged date
- Borrowers in a Chapter 13 Bankruptcy Repayment Plan can qualify for an FHA Loan after one year of filing a Chapter 13 Bankruptcy
- Borrowers who just had a Chapter 13 Bankruptcy discharge does not have any waiting period after the discharge of their Chapter 13 Bankruptcy discharged date
- Needs to be manual underwriting
- Verification Of Rent is required on all manual underwrites
- There is a three year waiting period after the recorded date of a foreclosure and/or deed in lieu of foreclosure or sheriff’s sale date to qualify for FHA Loans
There is a three year waiting period after the short sale date on a short sale.
Re-Establishing Credit After Bankruptcy And Foreclosure
After the bankruptcy, foreclosure, deed in lieu of foreclosure, short sale, borrowers applying for an FHA Loan needs to show that he or she is now fully employed and is back on their feet.
- Late payments after bankruptcy, foreclosure, and a short sale is normally not acceptable
- But is not a deal killer
- Full-time employment and the likelihood of employment of the next three years is required
- FHA wants to see that borrowers have re-established credit
Other Qualification Requirements
Borrowers who are under a Chapter 13 Bankruptcy Repayment Plan or have recently had a Chapter 13 Bankruptcy discharge can qualify for FHA Loans but will need to be manual underwriting.
- With manual underwriting, mortgage underwriters like to see compensating factors
- One such compensating factors that most manual underwriting mortgage lenders require is a verification of rent, also known as VOR
- Rental Verification is extremely important because it shows rental shock is not a factor
- Payment shock is the difference of the new mortgage payment versus the rental payment
- For example, if a renter was paying $1,000 per month for rent and the new mortgage payment is $1,050 the rental shock is 5% which is not bad.
- However, if the renter cannot prove verification of rent because he or she has been paying his or her landlord their rent payments with cash, then the current payment shock will go from $0 dollars a month to $1,050 per month.
- Rental verification will only count if the renter has 12 months of canceled checks paid to the landlord
If renting from a registered property management company, a letter from the property management manager will be sufficient.
HUD Approved Housing Course
There are instances where lenders may require borrowers to complete a one hour HUD approved housing counseling course:
- Needs to be taught by a HUD certified counselor
- Receive a certificate of completion that is signed and dated by the HUD approved housing counselor
Many first time down payment assistance programs will require a HUD Approved Housing Course Certificate.
Lenders With No Overlays
Gustan Cho Associates is a nationally recognized Fannie, Freddie, Ginnie Direct Lender with no overlays on FHA Loans. Loan Cabin Inc. only follows FHA Guidelines After Bankruptcy And Foreclosure and does not have additional overlays. Gustan Cho Associates Mortgage Group closes most home loans in 21 days or less.