30 Aug The New Rules For Getting An FHA Mortgage After Bankruptcy
The Federal Housing Administration, in a major policy change, has announced easier rules for people looking to get a mortgage after bankruptcy.
The Federal Housing Administration will allow a bankruptcy debtor to get a mortgage backed by FHA in as little as one year after bankruptcy – if certain minimal criteria are met.
The one year timeframe also applies to short sales and even foreclosures.
This is yet another acknowledgment that the â€œstigmaâ€ of bankruptcy has been replaced by the â€œnecessityâ€ of bankruptcy.
FHA Recognizes Bankruptcy Shouldn’t Make You Less Creditworthy
In a letter to lenders dated August 16, 2013, FHA Commissioner Carol Galante states:
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowersâ€™ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.
The FHA will consider borrowers who have received a bankruptcy discharge or short sale or foreclosure more that one year prior if the borrower experienced an Economic Event and can document the following:
- Prior to the economic event, the borrower had good credit and that certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrowerâ€™s control;
- the borrower has demonstrated full recovery from the event; and
- the borrower has completed housing counseling.
What Is An Economic Event?
The FHA defines an Economic Eventas “any occurrence beyond the borrowerâ€™s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrowerâ€™s Household Income of twenty (20) percent or more for a period of at least six (6) months.”
There seems to be an enormous gap in the definition, though. This definition does not take into account a borrower who becomes sick or disabled or who must care for a relative who becomes sick or disabled but who does not experience a decrease in income. So, the definition should be expanded to include borrowers who experienced an increase in expenses equal to twenty (20) percent or more for a period of at least six (6) months. But for now, this is a start.
Clearly, FHAâ€™s new policy is reflective of todayâ€™s economic reality.
As Americans start to come out of their foxhole and reenter this battered economy, they find themselves straddled with accumulated debt and massive negative equity in real estate â€“ be it their home or investment properties.
In order to fully recover, many Americans are turning to bankruptcy to get a fresh start. The FHA understands this, and seems ready to help people get a mortgage after bankruptcy.
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