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How to use a FHA loan after foreclosure

No Automatic FHA Loan Approval 3 Years After Foreclosure

Qualifying for a FHA loan 3 years after meeting the waiting period is not a guaranteed.

Tens of thousands of families are now, or close to being eligible to boomerang back into the Real Estate market after past foreclosure, short sale or bankruptcy.

2009 was one of the most active years for bankruptcy, short sale and foreclosure activity.  Families that endured these hardships have come through the tunnel and the light is on.

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After a short sale or foreclosure,  you are eligible for FHA financing after only 3 years.

No Automatic FHA Approval

The new FHA Commissioner is focused on more than just tightening FHA qualifying guidelines.  There is concern that lenders are giving people the idea that they will “automatically” be approved for FHA financing, 3 years after foreclosure.

Being Eligible is not an Automatic Approval

There is nothing automatic about qualifying for a FHA mortgage after foreclosure, more accurately I would say it can be more difficult in some cases.

The Commissioner suggested more data be collected from buyers with past foreclosure, in an effort to determine if there is a higher default or late pay risk with these boomerang buyers.

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If your foreclosed loan was a FHA loan, your waiting period doesn’t begin until FHA pays the initial claim to the lender.

FHA Eligible after Foreclosure

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Applying for a FHA Loan After Foreclosure

Current FHA guidelines do not penalize a borrower with past credit hardships like bankruptcy, short sale or foreclosure.  However, there are certain things that underwriters are looking at to determine that the hardship is unlikely to happen again.

  • Re-establish good credit:  DU, the automated underwriting system, considers the last 12 months.  Make sure you have a minimum of 3 credit lines, at least 1 revolving credit line (credit card).  Once you’ve established credit, maintain it by not making payments more than 30 days past the due date.
  • Determine it will not happen again:  You may be asked to provide a Letter of Explanation (LOE) to describe the circumstances around the hardship.  Your loan approval does not hinge on this letter, so don’t be alarmed if you’re asked this during the loan approval process.
  • Income / Employment:  Documenting income and establishing consistency and dependability of employment is the most important factor in qualifying for a home loan.

Harder to Qualify?

As of the writing of this article, there is no difference between applying for a FHA loan if you have a past hardship, and applying for a FHA loan if you have not had a past financial hardship.

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If you have questions or comments about specific situations or waiting periods, leave me a note below, or shoot me an email.

About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • TheRECoach says:

    Scott, in the “land of mortgage” you are the “Information Station”! Thanks

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