Back to Work by FHA - Buying a Home After Foreclosure

by C Cassel in Plymouth, MN and by Bettsy in Bridgeport, CT

Ask Kate about buying a home after foreclosure with FHA's Back to Work extenuating circumstances guideline: Everyone knows how difficult buying a home can be when a credit rating has been devastated by foreclosure, short sale, or deed-in-lieu of foreclosure transactions. But now there's encouraging mortgage news for homeowners who lost homes due to an economic loss during the recent recession.



In fact, FHA is coming to the rescue of beleaguered home buyers who were forced out of their homes due to what HUD has termed an Economic Event.
Economic Event: A loss of income and/or employment that was beyond the homeowner's control and resulted in a 20% decrease in income over a 6 month period.

Traditional lending guidelines generally require...

Traditional lending guidelines generally require a three year waiting period to be approved for FHA financing after foreclosure or bankruptcy. Fannie Mae and Freddie Mac guidelines state that up to seven years may be necessary to demonstrate credit worthiness.

FHA's new Back to Work extenuating circumstances guideline...

But under FHA's new Back to Work extenuating circumstances guideline, home buyers may not experience such an extended wait after a verifiable loss of income or employment that resulted in foreclosure, deed-in-lieu of foreclosure, or short sale. In this case, borrowers may be considered for a new FHA mortgage in as little as 12 months.

Besides being able to verify an Economic Event, there are a couple of more hoops for you to jump through before your new mortgage is approved, of course.
  1. The credit issues must have been restricted to the time surrounding your Economic Event.

  2. You'll also need to show an economic recovery. As an example, John is self-employed, falls ill, and loses his medical insurance after he can't work. The bills mount, he ends up in bankruptcy, then a short sale follows. A year later, John is healthy and wants to buy a house. Although his credit suffered from selling his home for less than he owned on the mortgage, he is now a salaried employee with medical and disability benefits.

  3. Your credit history since the Economic Event must be satisfactory.

  4. As a home buyer, you'll need to meet with a HUD approved housing counseling agency and receive a certificate of completion.

  5. Your mortgage approval will be subject to other FHA financing requirements.
This affords an excellent opportunity for many homeowners who suffered during the recession from, in the words of Donald Trump, an exploding mortgage coupled with an economic hardship. Hopefully lenders will get on board with the new guideline quickly.

Okay. Now for C's question about buying a home after foreclosure...

Buying a Home After Foreclosure

By C Cassel in Plymouth, MN
Back to Work by FHA - Buying a Home After Foreclosure

Hi Kate,

Is there a set waiting period after a foreclosure before I can purchase a home with the new mortgage guidelines? It has been 2 years for me now and would really like to purchase a townhome vs. continuing to rent with at least 20% down.

Rental rates continue to go up on 1 bedroom apartments and I will be retiring in a couple of years (I am 65).

Right now I still work and can afford rent, but do not want to pay $1200 to 1400 a month when I retire and would be harder to purchase something after retiring.

Thank you.

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: Buying a Home After Foreclosure

Hi C,

Well, as you can see the new FHA Back to Work guidelines may help you buy a home right now with no more waiting period.

With 20% down, you'll certainly bypass some of the bumps in the financing road often experienced after foreclosure.

The first step is to contact a mortgage lender and ask to be run through the mortgage pre-approval process to establish your options. Inquire into FHA financing but since you have such a substantial downpayment, don't rule out conventional loan programs.

If you are possibly able to qualify for a Fannie Mae or Freddie Mac mortgage (since you have 20% down), you would not have to pay private mortgage insurance (PMI). Sidestepping MI usually translates into a more affordable house payment.

But FHA also makes provisions for borrowers with a substantial downpayment to pay less mortgage insurance. Because these guidelines can change from time to time, ask what they are today.

For example, to avoid or decrease monthly MI, borrowers may be required to pay back the FHA home loan in 15 years. However, keep in mind that shorter terms drive up the monthly payments. So use common sense and always determine what's affordable for you.

Best wishes in your home buying pursuit,

Ask Kate

FHA and VA Loan Eligibility with Poor Credit

By Bettsy in Bridgeport, CT
FHA and VA Loan Eligibility with Poor Credit


Hi,

I'm currently working on building my husband's and my credit. We are in the low 600's but we are starting to research home purchasing with FHA or VA.

He is a veteran so can you tell us if we would be eligible now based on our credit? Or should we continue to work on it and wait it out?

Thanks, Bettsy

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Ask Kate answers: FHA and VA Loan Eligibility with Poor Credit

Hi Bettsy,

Because credit history is only one of many factors considered during the mortgage approval process, you need a comprehensive review from an experienced mortgage originator to know if FHA or VA are fitting options for you right now.

If you do not have one already, one way to find a trustworthy lender is to ask your friends and family who originated their mortgages and if they'd use them again. Then make appointments with three lenders, face-to-face if possible, to discuss your options.

After you've narrowed down your choices, ask to be be pre-approved. This way you can find out which is more affordable, FHA financing or a VA home loan.

Try not to be too disappointed if it turns out that you need more time to build your credit profile. Go here to get my effective and jargon-free tips for re-establishing your credit that will benefit you for years to come.

Best wishes for getting an affordable mortgage,

Ask Kate


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FHA Back to Work Loan
by: Beverly from Westerville, OH

Would a loss of income because of divorce qualify for FHA's Back to Work home buying program?

I had a bankruptcy in 2009, the foreclosure was final in 2012. I have re-established credit with a score of 711 (when last checked Feb. 2013).

I would like to buy a house this year if possible. I have about $8000 for down payment.

Hi Beverly, Kate here...

FHA's Back to Work program reduces the waiting period for getting a mortgage if borrowers can demonstrate an economic event (aka extenuating circumstances) which caused them to lose a home through foreclosure.

Guidelines describe circumstances beyond control as a 20% or greater reduction in income, for at least 6 months, resulting from job or income loss. Borrowers will also be required to demonstrate a full economic recovery with 12 months of re-established credit which has been paid timely.

But do not expect the lender to read between the lines. Prepare a concise letter explaining how the divorce led to a loss of income. End it with evidence of re-established income and credit.

Because the loan approval process is complex, do your best to offer complete documentation as verification of the explanation in your letter. Refer to my mortgage checklist for assistance.

Best wishes! Kate

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