Cut wait time for mortgage after foreclosure?


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Dear Real Estate Adviser,
My husband and I went through foreclosure in April 2013. We’re now looking to purchase again with an FHA loan. Two deaths in the family preceded our filing and they really hit us hard; we’re considering pleading extenuating circumstances. Would this help us get a mortgage more quickly?
— Genevieve V.

Dear Genevieve,
My deepest condolences to you and your spouse on the loss of your loved ones. As you know, these devastating events tend to drain family resources through unpaid leaves of absence, temporary relocation, onerous medical bills, excess travel and other financial sacrifices.

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FHA offers a chance

Fortunately, there’s hope for you and others who’ve suffered similar hardships to qualify relatively quickly for another federally insured mortgage through the Federal Housing Administration, or FHA, thanks to modified loan-qualification rules issued in late 2013 by the FHA, which is administered by the Department of Housing and Urban Development.

Previously, the FHA required that a minimum of three years pass in the wake of a foreclosure before it would back another mortgage. However, the updated FHA program, called “Back to Work,” has dropped the waiting period to one year for demonstrable hardship cases. The extenuating-circumstance guidelines also apply to bankruptcy discharge, deed in lieu of foreclosure, pre-foreclosure sale or short sale and to most hardship loan modifications.

You have to prove hardship

The burden of proof is on borrowers to demonstrate their past credit impairments. In your case, extenuating circumstances would likely fall under the FHA’s definition of an “economic event,” or any occurrence beyond the borrower’s control that resulted in a loss of job or income (or both) that caused a reduction of 20 percent or more in household income to the borrowers for six months or more

Additionally, you’ll need to show you’ve established satisfactory credit for a minimum of 12 months since the foreclosure was finalized. The last rung requirement will be to undergo brief housing counseling addressing the cause of that economic event and avoidance of its recurrence. (Such counseling can be done by phone or the Internet.)

Caveats: The mortgage loan must be made by an approved FHA lender; not all lenders participate. In some foreclosures, the lender may not take title for months, which delays the start of that one-year FHA waiting period. Hopefully your foreclosure was processed quickly.

The rule change is set to expire in September 2016, so get moving!

Good luck.

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