Derogatory Credit Events and FHA Loan Eligibility
If you want to take out an FHA loan, and you’ve had a derogatory credit event, such as a bankruptcy, foreclosure, pre-foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off occur within the few years, you may have to wait a bit before becoming eligible for FHA financing. Each type of event has its own waiting period, which is designed to protect both the FHA and the lender from the risk of taking on a borrower who may be likely to default on their loan.
Foreclosures Typically Require a 3-Year Waiting Period
In general, a foreclosure is the most serious derogatory credit event in the eyes of the FHA, and usually requires borrowers to wait at least 3 years before taking out FHA financing again. However, there are some exceptions to this; if a borrower can document extenuating circumstances, such as a “serious illness or the death of a wage earner” and they’ve significantly improved their credit since the foreclosure, they may be eligible before the 3 year waiting period. Divorce and job loss and/or relocation does not typically count as an extenuating circumstance. However, in the case of divorces, if the borrower’s ex-spouse received the property as a result of a divorce settlement, and the property was then foreclosed upon, an exception could be granted.
Short Sales Also Usually Require a 3-Year Waiting Period
Like foreclosures, short sales also usually require a 3-year waiting period before a borrower can once again become eligible for FHA loans. However, in some cases, having a short sale can make you permanently ineligible for FHA home financing. Specifically, if you went through with a short sale simply to take advantage of a bad housing market and bought a similar or better home nearby at a good price, you’re generally no longer eligible for FHA home loans.
Conversely, if you were actually fully current with your mortgage payments when you went through with your short sale, you could actually qualify for a new FHA loan much sooner— perhaps just months after your initial short sale. However, if you were in default during your short sale, or took advantage of the FHA’s pre-foreclosure sale program, you’ll have to wait for the full 3-year period. Just as with foreclosures, illness or death of a primary wage earner may be considered an extenuating circumstance that could get you out of the 3-year waiting period, while divorce and job relocation typically are not.
Chapter 7 Bankruptcies Typically Require 2-Year Waiting Periods
If you’ve undergone a Chapter 7 bankruptcy, you will usually have to wait 2 years after the bankruptcy has been discharged before being eligible for an FHA loan. However, if a borrower can demonstrate that they underwent bankruptcy because of “extenuating circumstances beyond their control” and, is now acting in a financially responsible manner, they may be able to become eligible in as little as 12 months. In addition, the borrower must be able to show that the specific events which lead to the bankruptcy are not likely happen again in the future.
Chapter 13 Bankruptcies Also Usually Require 2-Year Waiting Periods
In the case of Chapter 13 bankruptcies, borrowers must also usually wait at least 2 years after the bankruptcy has been discharged. If the bankruptcy has not been discharged for 2 years or more, a borrower could still be eligible for FHA home financing, as long as they have satisfactorily completed at least one year of on-time payments, and the borrower has written court permission to take out a new mortgage. Just as with Chapter 7 bankruptcies, the borrower needs to demonstrate that the circumstances involving the bankruptcy aren’t likely to recur.
Consumer Credit Counseling
Borrowers participating in a consumer credit counseling (CCC) program may be eligible for FHA loans, but only under certain circumstances. In order to be eligible, a borrower must have been involved in the program for at least 1 year of pay-outs, they must have been on-time with all payments, and they must also get written permission from their credit counseling agency to take out the loan. These rules apply equally to all types of FHA loans, including FHA 203(b) loans, FHA 203(k) loans, and FHA Streamline Refinances.