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FHA loans after foreclosure

By Polyana da Costa ·
Friday, August 23, 2013
Posted: 5 pm ET

Borrowers who lost their homes through foreclosure or short sale will no longer have to wait three years to get a mortgage to buy another home.

The Federal Housing Administration has changed the rules to help buyers whose credit was tainted due to the loss of a job or income reduction. They will now be able to get a mortgage to buy again after a one-year waiting period through the FHA's new lending program, dubbed Back to Work. The FHA previously required these buyers to wait three years before applying for a mortgage.

Buyers who can document they lost their home to foreclosure or filed for bankruptcy because they were laid off or because their income was reduced by at least 20 percent will be eligible to apply for a loan after paying their bills on time for a year, according to the instructions the FHA sent lenders last week.

The change is effective immediately until September 2016.

Now for the fine print

Borrowers will be required to provide documentation showing the loss of income or employment, including termination notices, tax returns and W-2s.

The program is designed to help potential buyers who went through a period of financial distress but have been able to get back on their feet and can afford a home again, says Jim Sahnger, a mortgage planner for FBC Mortgage in Jupiter, Fla.

"This is not going to work for strategic defaulters," he says.

Speeding up the process

The program is especially helpful to borrowers who went through bankruptcy and foreclosure simultaneously. Often, the lender doesn't take title of the property until years after the discharge of the bankruptcy, which has delayed the start of the waiting period for many potential buyers, he says.

During the one-year waiting period after the foreclosure sale, bankruptcy discharge or short sale closing, the borrower should have:

  • No late housing payments (rent/mortgage).
  • No more than one 30-day late payment on all other accounts.
  • No accounts in collection.

Borrowers will also be required to go through housing counseling prior to being approved for the loan. In addition, you can check your credit report for free at myBankrate.

Follow me on Twitter @Polyanad.

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Stephanie C.
August 19, 2014 at 11:20 pm

What is the minimum credit score required to be re-eligible for another FHA loan after foreclosure?

L. Jones
August 18, 2014 at 4:43 pm

I filed a Chapt 7 bankruptcy in 2009 and the bankruptcy was discharged in 2009. The pre-foreclosure proceedings were started in 2009 as well (after the discharge of my bankruptcy). I just found out this year that the foreclosure never completed and the loan company wrote-off the home in July 2013 instead of completing the foreclosure. Underwriting is still considering this a foreclosure and I am subjected to the 3 year waiting period from July 2013 - July 2016. Since this is still considered a foreclosure, I was on unemployment practically most of 2013. Could this be considered as a qualifying event for the Back to Work program?

August 09, 2014 at 4:42 pm

Yes, we too were just hit with the 3 year wait period...FHA guidelines state 3 years unless you can prove extenuating circumstances. Funny thing here is that we never lost our house due to foreclosure, it was filed with the court, I managed to get a stay so that I could still continue to fight with my bank to get a modification. We got the mod but it shows there was a foreclosure filed and we are still being told we cannot obtain another home loan!

Linda S.
August 08, 2014 at 2:19 pm

After reading this article on your site, I contact an FHA mortgage officer who advised me that the 3 yr waiting period is still in effect and your information is in correct. Any advise?
Thank you.
Linda S.

July 24, 2014 at 6:09 am

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Jamie johnston
June 30, 2014 at 9:22 pm

We lost our Home to foreclosure 2 years ago,just under the 20% loss in wages, wife had to work after our 2nd child was Born to make mortgage, after childcare puts us over the min 20‰¿ crazy to me but.....we have 700 credit scores and 20% down any suggestions.

Janie Lundbom
June 26, 2014 at 6:45 am

I lost my home to foreclosure 1 1/2 years ago because of disability. How or where can I go to see my options on building or buying another home? I desperately need housing!

Darin Hamilton
June 08, 2014 at 8:11 pm

Michael Evans please contact me at my email address.