Bankruptcy & Foreclosure

refinanceAfter you’ve gone through a bankruptcy or foreclosure you’ll want to pick up the pieces of your financial life and start over. Doing so is a process but it definitely can be done. In fact, it may be possible to put things back together more quickly than you would initially imagine. If you are a homeowner, FHA programs can enable you to bounce back from a devastating financial blow and help you regain control of your life.

Recovering from a Foreclosure

Home foreclosures happen when a homeowner is unable to meet the monthly mortgage requirements for the home. Foreclosures are typically a result of finances that have gone awry and can happen to anyone. Sometimes it is because of poor investing or a debt-to-income ratio that is too high, other times it’s a result of unforeseen circumstances such as a death, divorce or job loss. Typically by the time the home is foreclosed the homeowner has been struggling with the finances for quite some time. The result of a foreclosure is the physical loss of the home and a credit score that frequently drops 125 points; sometimes more, sometimes less. Regardless of the reasons for your foreclosure, FHA is set up to allow homeowners to purchase a new home 3 years from the date of the foreclosure. That three years is there so that the homeowner can rebuild the credit score and credit history. This is the time frame where you prove that you can once again handle the demands of a home.

Shedding the Impact of the Bankruptcy

While a foreclosure is a single default on a single loan, bankruptcy encompasses all of your finances. For some it’s wiping the slate clean so they can start over without the burden of debt– for others it’s a huge financial loss. As with the foreclosure, bankruptcy has a significant impact on your credit score, often up to 200 points or more. After bankruptcy it can be difficult to get any loan– particularly a home loan. Typically you’ll need to wait 2 years from the completion date of your bankruptcy to apply for another home loan. During this two years you need to rebuild your credit and credit history as you would be if you had been foreclosed on. FHA lenders require a minimum 580 credit score and a financial history that is free from late payments and default loans. However, each lender can choose to increase the requirements so you will need to discuss the exact details with your lender.

Exceptions to the Rule

refinanceFor years FHA guidelines have required 2 and 3 year time lapses before getting approved for a loan after a foreclosure or bankruptcy. Those guidelines have been altered in the past couple of years to help homeowners who were impacted by the recession in the economy. Many responsible homeowners found themselves bankrupt and without a home even though they had done everything else right. Understanding the plight of these people, the government created the “Back to Work – Extenuating Circumstances” program. This program waives many of the requirements, including the time frame for homeowners who lost at least twenty percent of their income due to a job loss or reduction in pay. This reduced income must have continued for six months and should be the primary cause for the defaulted loan. In some cases death or illness may be considered an extenuating circumstance but that would need to be discussed with the lender. If you fall into this category you may be able to apply for a loan after the lapse of only 1 year.

Requirements for Extenuating Circumstance

The Back to Work program is only for homeowners who have experienced severe financial loss that was beyond their control. It also needs to be a loss that is unlikely to happen again. To verify that this is indeed the case the lender has a series of qualifications that must be met before the loan can be approved. These requirements ensure that you have taken the steps to repair your finances.

  1. You can have no late payments on your housing whether you rent or own. A late payment will stop you from qualifying.
  2. You must have a spotless financial record. Any accounts that you have must have payments that were made on time. There is a little bit of leeway here but not much. For example, you can have one payment that was more than 30 days late from one of your accounts. Everything else must be made on time.
  3. You will be required to take a housing counseling course.
  4.  You will be required to provide proof of employment and income so that the lender can verify that you are in a financial position to handle the demands of the loan.
  5. You will need to show that your credit score was in good standing prior to the event that caused the foreclosure.
  6. You will be required to provide the lender with a letter of explanation regarding the foreclosure or bankruptcy. You may also need to provide documents that verify the circumstances in your letter of explanation.

Bouncing back from a serious financial setback doesn’t have to be a difficult process. While there is a time frame that you have to follow that is not that time frame is there so you can rebuild your credit and finances without the strain of a home loan. once that has been completed, FHA lenders are able to approve the home loan you need.

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