FHA recently came out with an exception to their guidelines that will allow borrowers to get an FHA loan only 1 year after a bankruptcy, foreclosure, short sale or deed-in-lieu. Here is a link to the 15 page Mortgagee Letter detailing the program.
Basically, instead of having to wait 3 years after the foreclosure, short sale or deed-in-lieu, or 2 years after the bankruptcy, the waiting period is only 1 year if you qualify for this exception. In order to qualify, the “credit impairments” had to have occurred as a result of an “Economic Event” defined as “Loss of Employment or a significant loss of Household Income beyond the borrower’s control.”
Lenders are interpreting that to mean at least a 20% decrease in income over at least a 6 month period of time. Here are the important things to note about this program:
- You have to complete home ownership counseling at least 30 days prior to APPLYING for a mortgage. Here in Yuma, Money Management International, Inc is currently the only place approved by HUD to do the counseling. They have an office in the Crescent Center, but they do the counseling over the phone, so just call 866-232-9080. It is a 1 hour counseling session, and there is no fee or cost.
- You will need to provide documentation of the “economic event” that led up to the foreclosure, short sale or bankruptcy. (Remember, that is being interpreted by lenders as at least a 20% reduction in income over at least a 6 month period). So that means providing 3 sets of income documents (paystubs, W2s, tax returns, employment verifications) from BEFORE, DURING and AFTER the event.
- Credit history will be closely analyzed. We will need to see that negative credit occurred as a result of the economic event – meaning, no negatives before the event. We also need to see no late payments in the most recent 12 months.
- There must have been a full 12 months passed since the foreclosure, short sale or bankruptcy date.
- This will be a “manually underwritten” loan. That means more paperwork, stricter guidelines about qualifying debt ratios, and closer scrutiny of all the documentation.
If you are interested in this program, I strongly recommend starting the pre-approval process well before you start looking for a home. Remember, the counseling must be completed at least 30 days prior to applying for a mortgage. That doesn’t mean you can’t have your credit pulled and start working on your credit right away.