Homeowners who were laid off and lost their homes to foreclosure could qualify for a new mortgage in as little as a year under an unprecedented federal rule change that slashes the usual waiting period between financial disaster and buying a new house.
Normally, homeowners who were foreclosed on must wait three years before they can qualify for a loan backed by the Federal Housing Administration. FHA loans require only a 3.5 percent down payment and have more lenient lending standards than conventional loans, though borrowers have to carry long-term mortgage insurance. Getting a conventional loan after foreclosure can take up to seven years.
The new changes allow borrowers who meet a set of strict criteria to qualify for an FHA loan only 12 months after losing their house for failure to make payments.
“To get A-paper institutional financing so soon after a foreclosure is unheard-of,” said Brent Wilson, with Comstock Mortgage in Sacramento, Calif. “It should increase the buyer pool throughout the country.”
The FHA announced the changes Aug. 15 in a letter to lenders titled “Back to Work: Extenuating Circumstances.” Officials say it was meant to acknowledge the reality of the recession, with its mass layoffs, and to help people return to home ownership.
“We’ve just been through an economic shock in this country when people lost their jobs through no fault of their own,” said Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development, which oversees the FHA. “Now we’re in a recovery, and many borrowers have become re-employed and are able to sustain a mortgage again.”
To qualify, borrowers must fit the FHA’s profile of those who deserve an early second chance.
They must have lost their homes in a foreclosure or short sale because they were unemployed or experienced a big drop in household income because of circumstances “beyond the borrower’s control.” They have to show they have recovered financially and otherwise have a clean credit record. And they have to complete housing counseling.