New American Funding Blog

Information on mortgages, refinancing & home buying

FHA Loan Guidelines: Rules Eased on Bankruptcy & Foreclosure

by Yelaine 8. October 2013 13:57
“As the economy started getting better we were hearing about more and more people whose access to credit moving forward was being stifled by the situation the country has been through, “ - FHA commissioner Carol Galante told the Los Angeles Times.

The Federal Housing Administration (FHA) announced that starting on August 15th, 2013 it is reducing the amount of time homeowners have to wait after losing their homes to get a new FHA backed loan. This new guideline should help get people back in the housing market faster; the previous penalty time of three years is now just one year.

The new rule change comes in the “Back to Work – Extenuating Circumstances” program that will run until September 30th, 2016. Back to Work states that the FHA will allow the consideration of borrowers who have experienced and can document periods of economic exertion due to extenuating circumstances.

As a direct result of the economic recession, a lot of people lost their employment or suffered severe reductions in income; some had untimely mortgage payments, others right down couldn’t make the payments, and lost their homes in foreclosure sales, deed-in-lieu, foreclosure, or a short sale - others filed bankruptcy to restructure debts. However, everyone that was hit by the instances aforementioned came out with a shot credit report.

The requirements are apt; aside from meeting all other FHA mortgage qualification criteria, borrowers have to prove that there was an extenuating circumstance such as job loss, business income reduction, or reduction in income of 20 percent or more for a minimum period of 6 months. Borrower must prove they and their incomes have completely recovered from the circumstance; credit score needs to be satisfactory. Also, proof that the borrower has spent one year making timely rent and credit-card payments since the circumstance happened, and documentation that a one-on-one counseling session has been completed must also be provided.

The Federal Housing Administration seems to be delivering a more well-adjusted yet flexible set of standards that put emphasis on acknowledgment of the hardships borrowers have faced by recession related events- and that due to that fact their credit pasts may not fully reflect their true predisposition to repay a mortgage now.

If you know anyone that would benefit or be delighted about the new FHA guidelines regarding bankruptcy & foreclosure, please pass this along!

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