The Federal Housing Administration (FHA) via a mortgage letter released Friday, Aug. 16, is now allowing borrowers who went through a bankruptcy, foreclosure, deed-in-lieu or short sale to re-enter the market in as little as 12 months.
Prior to this announcement, borrowers needed to wait at least three years before getting a chance to get approved for an FHA loan.
In order to be eligible for the more lenient approval process, provided documents must show “certain credit impairments” were from loss of employment or loss of income that was beyond their control.
The lender also needs to verify the income loss was at least 20 percent for a period of at least six months. In addition, the borrower must demonstrate they have fully recovered from the event that caused the hardship and complete housing counseling.
According to the letter released, recovery from an economic event involves re-establishing “satisfactory credit” for at least 12 months. Criteria for satisfactory credit includes 12 months of good payment history on payments such as a mortgage, rent, or credit account.
Keep in mind that FHA does not make loans. Rather it insures loans made by private lenders. It’s a type of federal assistance that has historically allowed lower income Americans to access borrower money for the purchase of a home that they would not otherwise be able to afford by an FHA approved lender.
The program has been around since the Great Depression when rates of foreclosures and defaults rose sharply. The program was intended to provide lenders with sufficient insurance. The goal was to a make it self-supporting based on insurance premiums paid by the borrowers.
To obtain this mortgage insurance from FHA, an upfront Mortgage Insurance Premium (MIP), about 1.75 percent of the base loan amount, would be required by close of escrow and paid to FHA on the borrower’s behalf.
There is also a monthly MIP which varies based on the amortization term and loan-to-value ratio. Over time this program has been modified to accommodate the changing needs of the real estate industry with a focus of increasing home construction and reduce unemployment.
As of this writing the FHA approved lenders have yet to really embrace these new guidelines. Many lenders have existing service pooling agreements with several investors each having their own overlaying guidelines. To find out the latest, please seek out a mortgage planner professional who is an FHA approved lender to find out who has implemented these new guidelines.
If you have questions regarding available inventory to purchase or the current bank servicer’s short sale incentives to sellers, contact Mike Mason, broker/owner of Mason Real Estate DRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Short Sale & Foreclosure Resource certified by National Association of Realtors® (NAR) at [email protected] or call (951) 296-8887.