November 26, 2010
Conventional loans can be unforgiving when it comes to credit scores, credit history, bankruptcy and foreclosure. In the current housing market, credit requirements on conventional loans are tougher than ever. One of the reasons government home loans are so popular is because FHA guaranteed loans are more lenient and flexible where credit is concerned.
The FHA even allows applicants to re-establish credit with an FHA loan even if they have previously declared bankruptcy or had a foreclosure. There are strict rules that cover these situations, but for those who qualify, the FHA mortgage is an excellent way to start over, reestablish credit and become a homeowner once more.
What does the FHA require in cases of bankruptcy? In keeping with the FHA requirements that lenders issue credit only to those who have established reliable payment patterns, applicants must apply no earlier than two years since the bankruptcy has been discharged and all judgmental associated with that bankruptcy must be paid in full. If there are outstanding tax liens, they must be satisfied or there must be an established repayment plan with the IRS or the appropriate State Department of Revenue.
In the case of foreclosure, the FHA rules state the buyer must wait a minimum of three years since foreclosure proceedings or a deed-in-lieu of foreclosure.
These rules apply whether you are applying for a new FHA mortgage or you’re trying to assume an FHA home loan. Assuming an existing loan still requires a credit check and other underwriting required by the FHA. In the meantime, any other documentation you can provide to show proof of on-time bill payments since resolving a bankruptcy or foreclosure can be important. Even at its most lenient, the FHA still requires proof the borrower is a good credit risk after an applicant’s
successful recovery from a wost-case financial situation.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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