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FHA Changes Eligibility For Borrowers Post-Bankruptcy and Post-Foreclosure


FHA loans have been a reliable source of mortgage lending for people with less-than-perfect credit. It is possible to get an FHA mortgage two years after a bankruptcy discharge. It is possible to get an FHA mortgage three years after the completion of a foreclosure on your home.

In the current economic environment, many consumers are faced with a foreclosure and a bankruptcy -- primarily to avoid a large personal deficiency at the end of the foreclosure process. In a non-judicial foreclosure state like Nevada, this may mean that most people are filing bankruptcy after the foreclosure process is complete. The wait time to qualify for an FHA mortgage may average out to just a little over two years.

However, in Illinois, things tend to work out differently. Early on in the foreclosure process, the average homeowner tries to work out a deal with the bank. Many people mistakenly believe that the entire foreclosure process will be on hold while they submit and re-submit documents. Even the restriction on dual-tracking requires that an application be submitted and complete. Banks are excellent at keeping files from reaching the "complete" stage. This means that the foreclosure process is marching forward in state court.

Many homeowners are surprised to find that a judgment is about to be entered against them. It may make sense to file a bankruptcy to slow down the foreclosure process and to remove personal liability on an underwater loan. A Chapter 7 bankruptcy will complete rather quickly; the foreclosure case, on the other hand, can drag on for quite a while. The homeowner may become eligible for an FHA loan because he is two years out of bankruptcy, but may still be ineligible because the foreclosure hasn't completed itself yet -- which means that the three year clock hasn't started ticking yet.

To help ameliorate this problem a bit, FHA has set a new criteria for eligibility. Consumers may now be eligible for an FHA mortgage one year after a bankruptcy, foreclosure, or short sale. That consumer had better be a renter, however. According to the Chicago Tribune, eligible borrowers must:

show their household income fell by 20 percent or more for at least six months and was tied to unemployment or another event beyond their control. They also must prove they have had at least one hour of approved housing counseling and, among other things, have had 12 months of on-time housing payments.

Even with these criteria, this is good news. However, if you are facing foreclosure and also contemplating a bankruptcy, you might want to investigate finding a rental sooner rather than later. Establishing that rental history will help satisfy the 12 months of on-time housing payments criteria.