New FHA Borrowing Standards

Last week the US Department of Housing and Urban Development, the agency which oversees the Federal Housing Administration, released a new set of FHA guidelines for mortgage qualifications. The full letter with the guidelines is available here.

The main thrust of the letter is new qualifications for certain borrowers with previous foreclosures, deed-in-lieu of foreclosures, short sales or bankruptcy. The old rule was a person with a foreclosures, deed-in-lieu of foreclosures, short sales or bankruptcy would have to wait 3 years to qualify for a new FHA backed loan (since most loans now are FHA backed, it became a de facto standard).

Now the FHA will back loans for people who have a previous foreclosure after 1 year under certain circumstances. To qualify for the shorter waiting period, the potential borrower, in addition to the normal qualification requirements, must show

  • 1. a loss of employment or a significant loss of family income (a loss of at least 20% of household income for at least 6 months) caused the foreclosure, deed-in-lieu of foreclosure, short sale or bankruptcy,
  • 2. borrower has fully recovered from the loss of employment or significant loss of family income (by showing 12 months of debt payments and removing major derogatory credit issues on credit card accounts), and
  • 3. borrower has taken housing counseling.
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