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FHA - Borrowers Can Qualify In Just One Year After Foreclosure, Short Sale, or Bankruptcy

In a bid to perhaps stay relevant, though in the FHA’s own words, to continue “its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances,” borrowers may now be eligible for an FHA loan just one year after experiencing a short sale, foreclosure, or even a bankruptcy.

From FHA Mortgagee Letter 13-26:

Borrowers that may be otherwise ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage if the borrower - can document that the delinquencies and/or indications of derogatory credit are the result of an Economic Event as defined in this ML has completed satisfactory Housing Counseling, as described in this ML, and
meets all other HUD requirements.

An Economic Event is any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months.

The Onset of an Economic Event is the month of Loss of Employment/Income.

Recovery from an Economic Event is the re-establishment of Satisfactory Credit (as defined on page 5 of this ML) for a minimum of twelve (12) months.

The term borrower includes borrowers and co-borrower.

Borrower Household Income means the gross income of the borrower and all Household Members, as defined below, for purposes of assessing loss of income. The gross income of each Household Member must be computed in accordance with FHA income requirements.

Note: Household Member, for the purpose of this ML, means an individual residing at the borrower’s primary residence at the time of the Economic Event and who was a co-borrower on the borrower’s previous mortgage.

To sum it up, in order to qualify you must:
Prove the negative credit event was the result of a loss of employment or significant loss of income

Prove that you have recovered and re-established satisfactory credit

Apply at least 12 months after the negative event took place

Complete housing counseling to avoid similar missteps in the future

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