Bad Credit? Getting an FHA Loan Just Got Easier
Homebuyers who lost their homes because of recession-induced employment cuts may be able to return to the housing market sooner than they previously thought.
In an Aug. 15 letter, the Federal Housing Administration (FHA) added economic events to its list of extenuating circumstances and reduced the waiting period between foreclosure and loan qualification from 36 months to 12 months.
“This will help consumers who went through housing hell — a foreclosure or short sale — to become homeowners again and take advantage of low interest rates and decent home prices in many parts of the country,” said Gerri Detweiler, Credit.com’s director of consumer education.
How FHA Loans Work
The FHA, part of the U.S. Department of Housing and Urban Development (HUD), insures mortgages to allow lenders to give borrowers affordable loan, by way of easy credit qualifications, reduced down payments or lower closing costs.
To apply for an FHA loan under the shortened timeline, borrowers must meet certain criteria: The borrower must have experienced a period of six months or longer during which household income was reduced by at least a 20%, as a result of job loss or pay cuts beyond the borrower’s control; re-established his or her credit for at least a year; and completed housing counseling.
The letter outlines the requirements in greater detail. The adjustments to the loan program were effective immediately, through September 2016.
“The purpose is to assist those who faced an economic event as a result of the Great Recession,” said Lemar Wooley, a HUD public affairs officer. “The period of time was selected because we believe it appropriately captures the population of those impacted by the recession and gives sufficient time for them to rebuild their credit.”
How to Qualify for an FHA Loan
Eddie Hilliard, branch manager of Integrity Home Loan of Central Florida, said he is already starting to work with homebuyers who may qualify. For the past three months, Florida has had the highest foreclosure rate in the country.
“I can’t tell you right now how many people I had to turn away over the last year, year-and-a-half, two years,” Hilliard said. “‘Sorry, you had a foreclosure in the last 36 months, can’t do it.’ Now I’m going to be making all these calls saying, ‘Hey Mr. and Mrs. Jones, guess what — the guidelines have changed.’”
Meeting the borrower criteria requires many steps of documenting your income and credit history. Hilliard recommends potential homebuyers reach out to lenders with experience in FHA loans so the process goes as smoothly as possible. For instance, a borrower must complete the mandatory housing counseling at least 30 days and no more than six months in advance of applying for a loan. That’s something to consider before the house hunt commences — timing is important.
It’s also crucial for consumers to check their progress in repairing their damaged credit. Re-established credit, according to the FHA letter, means a history clear of late housing payments, debt payments or issues on revolving accounts, and any current mortgages must show a year of timely payments. Potential homebuyers can use the free Credit Report Card to see how they’re recovering and make plans to improve their credit. You can also pull your credit report once a year for free from each of the major credit reporting bureaus.
The timing of this program may be a huge opportunity for some who thought they couldn’t buy a home for a few more years.
“Now’s the time for those who really can afford to own a home to do so, before we see interest rates and housing prices climb,” Detweiler said. “These loans can help turn renters into homeowners, which in turn helps stabilize neighborhoods and communities.”