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Saturday, March 30, 2013

Obtaining an FHA Home Loan with Bad Credit or Bankruptcy

By Daniel Duffield

Times have been tough for many homeowners whose credit scores have greatly suffered as a result of the housing market collapse. For borrowers with bad credit, qualifying for a home loan can seem like a daunting task, especially following a credit-damaging event such as bankruptcy, foreclosure, or short sale. However, it’s never too late to turn things around; though challenging, borrowers who wish to obtain an FHA loan after bankruptcy can qualify, with some patience and financial responsibility.

FHA Loan After a Bankruptcy

Many people wonder if they can get a FHA home loan after a bankruptcy during these recent, troubled years. The short answer: it depends.

Chapter 7 Bankruptcy Guidelines

For borrowers that have filed Chapter 7 Bankruptcy, they must be discharged a minimum of two years. Anyone with a discharge date less than two years old will be faced with some strenuous documentation. These exceptional situations may still be considered, so be prepared to state your case. Borrowers need to provide proof of beginning new credit history with satisfactory payments. Alternatively, if the borrower has decided not to borrow again after the bankruptcy, they must outline the causes for the bankruptcy. Borrowers will have significantly better chances of getting approved for an FHA loan with bankruptcy, if they can successfully prove to a lender that they can successfully manage typical home expenses and that they have effectively “learned their lesson.” These individuals should look for the lowest mortgage rates so that they have a better chance of keeping up with the payments.

 If you have filed for Chapter 7 Bankruptcy, you should:

Wait a minimum of 2 years after being discharged
Collect and provide proof of new, spotless credit history to your lender
If you do not plan to borrow again, outline the causes for the initial bankruptcy

Chapter 13 Bankruptcy Guidelines

For individuals currently participating in a Chapter 13 repayment plan, the first step make twelve months of on-time payments into the plan. This will signal to a lender that the borrower has become more responsible in managing finances. Secondly, borrowers will need to get approval from the bankruptcy court to enter into the mortgage agreement. An FHA loan does not have any penalties for prepayment and the rates are excellent. People who filed a Chapter 13 bankruptcy within the last few years should contact a FHA lender to discuss the possibility to get approved for a home loan.

If you have filed for Chapter 13 Bankruptcy, you should:

Make 12 months of payments on-time
Get approval from the bankruptcy court

For people involved with Consumer Credit counseling, the guidelines are akin to the Chapter 13 guidelines. Borrowers need to prove they have made on-time payments for at least the past 12 months and get their counseling agency’s recommendation to proceed with a FHA loan after bankruptcy.

If you find yourself in any type of bankruptcy or credit counseling, it is vitally important that you make all payments on time. In addition to improving your chances of acquiring a loan, this will prevent any additional negative items appearing on your credit report.

FHA Loan After a Foreclosure

As with bankruptcy, foreclosure does not necessarily ruin your chances of acquiring an FHA loan. While foreclosure does severely damage a borrower’s credit rating, borrowers who had no control over the foreclosing of their properties can still qualify and acquire an FHA loan with patience and prudent financial management.

Extenuating Circumstances

To qualify for an FHA loan, post-foreclosure borrowers must be able to provide excusing reasons for their foreclosure. Specifically, the cause of the foreclosure must be through extenuating circumstances which the borrower could have no control over. For instance, serious illness, the death of a spouse, or a job transfer all occur beyond the control of the borrower and thus would circumstantially excuse a foreclosure, allowing the borrower to reapply once the foreclosure is sufficiently dated.

Waiting Period

In terms of the mandatory waiting period, borrowers who have endured a foreclosure must wait a minimum of three years from the completion date of their foreclosure, i.e. the date in which the deed transfers to the next owner, before they are able to qualify for an FHA loan. This figure is deceptive, however, since the last thing a borrower should do after a foreclosure is to passively wait. If you intend to secure an FHA loan as soon as possible, the three years following a foreclosure will be the most significant factor for a lender in determining whether or not you will qualify.

Re-establishing Credit

After a foreclosure or similar credit-damaging event, re-establishing credit is the most important step for borrowers who would pursue another loan. When applying for an FHA loan after a foreclosure, lenders will scrutinize your credit history, and many require at least four new lines of credit, all of which must be more than two years old. Therefore, treating the waiting period literally will end up costing you much more time than if you immediately begin new credit lines following your foreclosure.

Proving Reliability

Furthermore, qualifying for an FHA loan post-foreclosure requires convincing the lender that you are the definition of financial responsibility and that you deserve another chance. In doing so, it is critically important to make payments on time. Late payments will require letters of explanation to be considered by the FHA underwriter overseeing your loan, so save yourself the trouble and avoid making late payments.

FHA Loan After a Short Sale

Purchasing a home after a short sale may seem like quite a challenge; however, if your short sale was the result of extenuating circumstances, you should have no problem qualifying for an FHA loan.
Waiting Period Removed for Some

In fact, the Federal Housing Administration recently made changes to loan policy, making it easier than ever for borrowers to acquire an FHA loan. Although the waiting period for post-short sale borrowers has traditionally been three years, new regulations have eliminated the waiting period for borrowers who were current on their mortgage payments during the time of the short sale and who made all mortgage and installment debt payments on-time within the past twelve months.

Qualifying after Default

Even a borrower in default at the time of the short sale may qualify for an FHA loan sooner than three years with extenuating circumstances, provided his or her credit remained at a reasonable score until the default.

However, keep in mind that these changes only reflect the official FHA loan guidelines; when seeking a loan, qualification rests on the discretion of the lender, and borrowers may find many lenders that will refuse to make offers to anyone with short sales less than three years old. Needless to say, any borrower who engaged in a short sale to take advantage of weakening market conditions and intends to buy a similar property in the same area will not qualify for an FHA loan.

Where to Find an approved FHA Lender Near You

If you are considering taking out an FHA loan, it is important to shop around to find the absolute best rates for your loan. Due to the large amounts of money in an FHA loan, small adjustments in interest rates can make a significant difference in the total cost of your loan. To find the best possible rates for your future FHA loan, simply fill out our Lender411’s FHA Mortgage Request a Quote.

My name is Scott Grebner and I have been helping my clients realize their own personal real estate dreams. Real estate is a relationship-based business that works best when client relationships are built on trust and confidence. My goal is having clients be completely satisfied with the professional and caring service they have received.

The role of technology is rapidly changing how the real-estate market functions in this country today. Gerharter Realtors is embracing these new mediums of communication to better serve our customers. We have created our e-family to better place important information in your hands to help you with your housing needs. As a part of Gerharter Enterprises we have access to a broader range of additional services and resources to better assist you. Visit me at my Web Site, Blog, Facebook, Twitter, You Tube or Pinterest. Please check out our helpful resources on Sellers Tips, Buyers Tips, Foreclosure Tips, and Mortgage Tips. For a personal consultation please visit our Office.

It seems that the dream of past generations was to pay off a mortgage. The dream of today’s young families is to get one. I would love to hear from you, about your Real Estate Dreams and questions.

Email me at scott@gerharterrealtors.com.

11 comments:

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