Have a short sale in your past? A foreclosure? A bankruptcy?
If so, you may, like many others, feel like you’ll not be able to qualify for a home loan for a long time. However, nothing could be farther from the truth. Changes by the FHA have made it possible for individuals who have experienced short sales, foreclosures, or bankruptcies to re-enter the housing market much sooner than expected.
In the past, having these events in your credit history would have barred you for years from getting financing to buy another home or property. In the wake of the recent housing crisis, however, the federal government made changes to accommodate the millions of Americans who had been impacted, often through no fault of their own.
In August 2013, the FHA announced a new underwriting guideline known as Extenuating Circumstances Exceptions. Under this new guideline, borrowers don’t have to wait as long after a short sale, bankruptcy, or foreclosure to qualify for an FHA loan. For those who have experienced extenuating circumstances, the minimum waiting period has been decreased from three years to only 12 months.
The guidelines define “extenuating circumstances” as events beyond your control that led to:
- A loss of employment and/or
- A loss of income
The requirement here is that you must be able to provide proof that the hardship that led to your short sale, bankruptcy, or foreclosure falls into one or both of these two categories above. You also need to furnish proof that you have recovered from your unfortunate event and can meet FHA loan requirements. Some of this will happen via a meeting with a housing counselor who has been approved by the U.S. Department of Housing and Urban Development (HUD). How you will prove your hardship and your recovery will depend on how the FHA determines such things. These specifics are covered next.
Proving Your Hardship
How does the FHA determine that your hardship involved a loss of employment and/or a loss of income? The FHA defines a qualifying loss of income as “a reduction in household income of at least 20% for six months or more.”
To show this, the FHA requires documentation that shows your pre-hardship income, which can be verified through signed tax returns, W-2 forms, or a written Verification of Employment (VOE). If your pre-hardship income was from seasonal or part-time employment, you need to prove that employment was continuous for two years or more leading up to the start of your hardship.
To prove a loss of employment, the FHA requires that you provide a written termination notice from your previous employer. In the event that your former employer is no longer in business, you must furnish documentation that that they did indeed go out of business and you must have proof that you received unemployment benefits afterward.
Lastly, it will be up to your lender to verify that your hardship truly caused the damage to your credit profile, as opposed to any irresponsible actions after the period of hardship.
Proving Your Recovery
To the FHA, a recovery means that you have maintained “satisfactory credit” for 12 months or more. “Satisfactory credit” means "no major derogatory credit issues on revolving accounts” and no late payments on a mortgage loan or any other installment debts.
If your mortgage was modified and you successfully made your modified payments on time for 12 months straight, you may still qualify.
If you have an un-discharged Chapter 13 bankruptcy on which you faithfully made your payments on-time for 12 months, you may still qualify.
Proving that you’ve recovered in the eyes of the FHA really comes down to the 12-month requirement.
The final step in re-establishing your eligibility for an FHA loan after financial hardship is meeting with a counselor from an HUD-approved housing counseling agency for an hour-long, one-on-one session, which can be online, over the phone, or in person. It also must be done between six months and 30 days before your loan application is submitted and provides you an opportunity to speak to the causes of your hardship and how you’ve moved past it. Most importantly, you must take this opportunity to convince the counselor that this hardship will not likely happen again.
It's Worth It!
If you look at these FHA loan requirements and think, “Wow, those are a lot of hoops to jump through,” consider the alternative. If it weren’t for the new guidelines put forth by the FHA, you might have to wait for three years or more to get back into a situation of home ownership. Thanks to the FHA’s action for people in these situations, you and millions of other Americans can bounce back more quickly from foreclosure, bankruptcy, or short sale to reclaim the benefits and pride that come with owning your own home.
Find Out Now How Quickly You Can Get Back Into Owning Your Own Home With an FHA Loan.
Want to see if you qualify for an FHA Loan after a short sale, foreclosure, or bankruptcy? Contact a Mortgage Advisor today.