I came across this article and had to share it. With so many people effected by the real estate bust, many people we’re forced into bankruptcy or foreclosure. But there is light at the end of the tunnel! And I hope this news puts a few smiles on those faces.
Enjoy – Sabrina
Re-Entering Homeownership: FHA Loan Guidelines After Foreclosure and Bankruptcy
By: Lisa Burden
Many people who have been through a foreclosure in the recent past would like to become homeowners once again. For some, three years have already passed which makes them eligible to purchase a home through an FHA loan. Since being eligible does not automatically mean qualified, there are several issues that these potential home buyers should know in order to make the return to homeownership as easy as possible.
FHA will accept mortgages, after three years have passed, from borrowers who had a previous principal residence foreclosed on or that borrower gave a deed-in-lieu of foreclosure. FHA allows a lender to make an exception to this three year requirement if the foreclosure was the direct result of extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of the wage earner. This event must be fully documented and the borrower must show the re-establishment of good credit since that time. While an occurrence such as divorce is not extenuating, it may be considered if the ex-spouse received the residential property and proceeded to foreclosure. On the other hand, situations such as being unable to sell the property due to a transfer of work or relocation is not considered an extenuating circumstance.
FHA mortgages also have specific rules regarding Chapter 7 bankruptcy (liquidation) and Chapter 13 bankruptcy:
For a Chapter 7 bankruptcy, a period of two years must have passed since the date of discharge of the bankruptcy. During these two years, the borrower must have re-established good credit or chosen not to incur new credit obligations. In some cases, a period of less than two years, but not less than 12 months, is acceptable for an FHA insured mortgage. In these instances, the borrower must be able to show that the bankruptcy occurred due to extenuating circumstances beyond their control and can document that they have once again established the ability to manage their financial affairs in a responsible manner. It is important for the lender to show through documentation that the events that led to the bankruptcy are not likely to occur again.
For a Chapter 13 bankruptcy, documentation must show that at least two years have passed from the discharge date of the bankruptcy. Less than two years downgrades the loan to a “Refer” which then must be manually underwriter by a Direct Endorsement underwriter. Chapter 13 requires that the lender document that at least one year of the payout period has passed and that the borrower has made all required payments on time since payment performance must be satisfactory. The borrower must also have written permission from the bankruptcy court to enter into a mortgage transaction.
While the country continues to meet the challenges that occurred due to the consequences of the housing crisis that started to appear in late 2006, many previous homeowners are now ready to make another home purchase after suffering through one of these unfortunate circumstances. For many, since the required time has passed, they are now eligible to be considered for an FHA mortgage. Borrowers must have all of these important documents ready for submission to the lender, as well as, be ready to prove their creditworthiness for qualification.
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Thanks for reading – Sabrina