FHA Back to Work: 1 Year Waiting Period After Foreclosure And Bankruptcy

The U.S. Housing and Urban Development, also known as HUD, has shortened the waiting period for those folks who had filed a prior bankruptcy and/or had a prior foreclosure to a one year waiting period to qualified home buyers.  The real estate and credit collapse of 2008 has caused millions of homeowners and hardworking American workers financial hardship which has forced them into bankruptcy and/or foreclosure due to being terminated from their jobs or losing their businesses.

2008 Real Estate And Mortgage Meltdown

Never in the history of the United States has the Great Recession of 2008 affected so many American workers and businesses.  Bankruptcies and foreclosures have soared to historical levels.  Many American workers today are in jobs where they are over qualified and are still underemployed.  HUD realized this and have launched the new FHA Back to Work Extenuating Circumstances due to an economic event mortgage program last August 15, 2013 where it shortens the waiting period to one year after someone has filed a bankruptcy and/or had a foreclosure.  Deed in lieu of foreclosure as well as short sales fall into this category as well and those who had a deed in lieu of foreclosure and/or short sale qualify for HUD’s FHA Back to Work extenuating circumstances due to an economic event mortgage program if they meet HUD’s Back to Work mortgage lending guidelines.  All Back to Work mortgage loan program are manual underwrites and not all mortgage lenders offer it.

Waiting Period After Foreclosure And Foreclosure

The traditional waiting period for those who have filed bankruptcy or had a prior foreclosure, short sale, deed in lieu of foreclosure is still in effect.  The waiting period for those who had filed a prior bankruptcy is two years from the discharge date of the bankruptcy to qualify for a FHA insured mortgage loan.  Unfortunately, there is a seven year waiting period to qualify for a conventional mortgage loan after the discharge date of a bankruptcy.  The waiting period is three years from the recorded date of a foreclosure or a deed in lieu of foreclosure to qualify for a FHA insured mortgage loan.  For those who filed a foreclosure, the waiting period is seven years for them to qualify for a conventional mortgage loan.  Those who had a deed in lieu of foreclosure, the waiting period is two years to qualify for a conventional mortgage loan if and only if they can put a 20% down payment on their home purchase.  The waiting period is four years if they can put a 10% down payment on their home purchase.  The waiting period is three years from the HUD’s Settlement statement for those who had a prior short sale.  A homeowner who had a prior short sale can qualify for a conventional mortgage loan after two years from the date of the short sale if and only if they can put a 20% down payment on their home purchase.  They need to wait four years if they can put a 10% down payment on a home purchase.

Does Waiting Out The Waiting Period Guarantee Me A Mortgage Approval?

The above answer is NO.  Just because you have waited out the waiting period does not guarantee you a mortgage approval by any means.  In order to get an approve eligible per Fannie Mae’s Automated Underwriting System or Freddie Mac’s Automated Underwriting System, the mortgage loan applicant need to prove that they have had re-established credit.  Many of those who had an economic event and had to file bankruptcy and/or had a prior foreclosure or short sale want to stay away from credit and only deal in cash.  Unfortunately, this practice is not accepted in the mortgage lending industry.

Re-Establishing Credit After Bankruptcy And Foreclosure

HUD want home buyers and first time home buyers that they have re-established credit after their bankruptcy and/or foreclosure and wants to see at least three credit tradelines established.  A credit tradeline is an established credit account such as credit card account, department store account, or auto loan account that has been seasoned for at least 12 or more months.  Late payments are frowned upon after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale and one late payment can be a deal killer depending on the mortgage lender.

Rental Verification Is Extremely Important

For those living rent free with family, there is nothing they can do but for those who are paying rent from renting a home or apartment, rental verification is one of the most important factors if you want a home loan with bad credit.  Rental verification is proven by providing 12 months worth of cancelled checks that is paid to your private landlord.  If you are legitimately renting an apartment or home but you are paying with cash and get a receipt, the mortgage lender will not consider any cash rental payment as proof of rental verification even though you have a receipt from the landlord.  Partial cash payment and partial check payments cannot be used to prove rental verification.  It needs to be a bank check and 12 months of cancelled checks are required.

Verfication Of Rent From Property Management Company

However, if your landlord is a registered property management company and you are paying them in cash, a letter from the property manager stating that you have been timely with your rent payments for the past 12 or more months can be used as proof of rental verification.  Again, that is only if it is a registered licensed property management company.  Rental verification is extremely important because of payment shock.  Mortgage loan underwriters take the fact that if you have no rental verification, your payment shock from paying zero rent to your new mortgage payment will reflect a payment shock.  They like to see, for example, that you are paying $1,000 in rent and that your new mortgage payment will be the same or no more than a 30% or so increase so you do not have payment shock.

One Year Waiting Period After Foreclosure And Bankruptcy

As mentioned earlier, HUD’s new FHA Back to Work extenuating circumstances due to an economic event shorten the waiting period to one year waiting period after foreclosure and bankruptcy.  Back to Work mortgage lenders want to see that after you filed bankruptcy and/or had a foreclosure, deed in lieu of foreclosure, or short sale that you have re-established credit.  By re-established credit, it means no late payments whatsover after your foreclosure, bankruptcy, deed in lieu of foreclosure, or short sale.  Secured credit cards are the best tools to the road of good credit.  If you recently had a bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure, you shoud get three $500 credit limit secured credit cards as soon as possible.  Those three credit cards will improve your credit the minute you get it and as your credit card payment history ages, your credit will get better and better.

Secured Credit Cards Are Best Way Of Re-Establishing Credit

There are many cases where people have credit scores of 700 FICO one year after filing bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale by just getting three secured credit cards and effectively using those credit cards and paying off the credit balances each month.  After one year of having and using the three secured credit cards, you will be able to secure unsecured credit cards and other credit such as department store credit cards and installment loans.

FHA Back To Work Extenuating Circumstances Due To An Economic Event Mortgage Qualifications

To see whether or not you qualify for HUD’s new FHA Back to Work Extenuating Circumstances due to an economic event mortgage program, you need to do the following:

1.  Provide a detailed letter of explanation describing your extenuating circumstances due to an economic event.  You need to have been unemployed or underemployed at least six months prior to the initiation of your bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale and the loss of your job or business had to have been your primary reason that you have filed bankruptcy, or had a short sale, foreclosure, or deed in lieu of foreclosure.

2.  You need to have had good credit and payment history until the loss of your job or business.  If you had bad credit and/or credit history prior to the loss of your job or business, you will not qualify.  Your credit must have been good to excellent and have dropped due to the loss of your job or business.  After the foreclosure, bankruptcy, short sale, and/or deed in lieu of foreclosure, your credit scores need to be on an upward trend and you have to have re-established credit with no late payments since your bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

3.  You need to take a HUD approved housing counseling course and have a signed certificate by the housing counselor.  You cannot apply for a mortgage loan until 30 days after the date of the housing certificate.

4.  All FHA Back to Work Extenuating Circumstances due to an economic event mortgage loans are manually underwritten.  Manual underwriting mortgage loans have lower debt to income ratio requirements.  The front end debt to income ratios need to be at 31% and the back end debt to income ratios are normally capped at 43%.  These debt to income ratios can exceed the recommended mark as long as the mortgage loan borrower has compensating factors.  Examples of compensating factors include substantial reserves, larger down payment, and rental verification.

If you are a mortgage loan borrower in Illinois, Florida, Wisconsin, California, or Indiana and feel that you qualify for HUD’s FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program, please feel free to contact me at 262-716-8151 or at www.gustancho.com .

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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