April 14, 2014
There are loan rules for when a borrower can apply for a new FHA mortgage following a short sale, bankruptcy, or similar scenarios, but one area that is commonly misunderstood is what happens when a borrower goes into foreclosure on a home purchased with an FHA mortgage, with regards to how soon after that bankruptcy has been disharged.
FHA loan rules for this situation can be found in HUD 4155.1 Chapter Four, Section A. It says, “If the borrower has had past delinquencies or has defaulted on an FHA- insured loan, there is a three-year waiting period before he/she can regain eligibility for another FHA-insured mortgage.”
In addition to clearing up confusion over that basic policy, Chapter Four also addresses when that waiting period is considered effective:
“The three-year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure, as well as judicial and other forms of foreclosures. Lenders should contact the Homeownership Center (HOC) having jurisdiction over the area where the property subject to default is located for information such as the
• date the claim was paid, and
• date of the initial default.”
Borrowers with an FHA loan foreclosure in their credit history may experience difficulty with finding reduced interest rates or other problems during a house hunting phase–it all depends on the type of credit patterns you have established in the aftermath of that foreclosure.
What’s an FHA loan applicant to do? FICO scores, loan repayment history, and other financial qualifying data play an important role in the house hunting process. Instructions to the lender include the following from Chapter Four:
“…the overall analysis of the borrower’s creditworthiness must
• consider a borrower’s previous failure to make payments to the Federal agency in the agreed-to manner, and
• document the lender’s analysis as to how the previous failure does not represent a risk of mortgage default.”
Understanding how FHA and participating lenders view these issues can be a huge help when preparing for a new loan application. Sometimes knowing is half the battle–borrowers should prepare for a new loan application by having at least 12 months of on-time payments for all financial obligations at the time the new loan paperwork is filled out. That can go a long way toward helping your lender understand you’re a better credit risk since the time of the FHA loan foreclosure.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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