FHA easing rules for some credit-impaired applicants

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Borrowers with “extenuating circumstances” may qualify sooner to buy another home after a foreclosure, short sale,   bankruptcy, or deed in lieu of foreclosure.

FHA is taking a slightly different approach to “extenuating circumstances” that may have triggered steep drops in an applicants’ credit scores. FHA historically has been more willing to consider the contributing factors that make credit-impaired applicants look more risky than they really are compared to conventional market investors or insurers.

The new guidelines emphasize that FHA recognizes the hardships faced by “certain”  borrowers that were hit by recession events, and realizes that their credit histories may not fully reflect their true ability to repay a mortgage.

Extenuating circumstances are important to FHA in evaluating whether a borrower who experienced a foreclosure, short sale, deed-in-lieu, bankruptcy or other event in the past, but is now employed and paying credit accounts on time should be considered eligible for a new instant loan.This new guidance offers the potential of waiving FHA’s standard waiting periods from one of these events to qualify for a new mortgage.

As an example, let’s say an individual lost his job during the recession, couldn’t pay the mortgage and eventually was foreclosed upon. Under standard FHA waiting times, that person might not be eligible for a new loan for up to three years.

However, if the applicant qualifies as having experienced “an economic event” — defined in the new guidance as “any occurrence beyond the borrower’s control that results in loss of employment, loss of income or both” that causes a 20 percent decline in household income for at least six months — the applicant might be qualified to obtain a new FHA-insured mortgage in as little as one year instead of three.

This could be good news for some of the people who went through a foreclosure, short sale, bankruptcy, or deed in lieu of foreclosure and who want to own another home as soon as possible.