FHA Trims Waiting Period for Borrowers Who Experienced Foreclosure

 

The Federal Housing Administration (FHA) is allowing borrowers who went through a bankruptcy, foreclosure, deed-in-lieu, or short sale to reenter the market in as little as 12 months, according to a mortgage letter released Friday.

 

Borrowers who experienced a foreclosure must wait at least three years before getting a chance to get approved for an FHA loan, but with the new guideline, certain borrowers who lost their home as a result of an economic hardship may be considered even earlier.

 

For borrowers who went through a recession-related financial event, FHA stated it realizes “their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

 

In order to be eligible for the more lenient approval process, provided documents must show “certain credit impairments” were from loss of employment or loss of income that was beyond the borrower’s control. The lender also needs to verify the income loss was at least 20 percent for a period lasting for at least six months.

 

Additionally, borrowers must demonstrate they have fully recovered from the event that caused the hardship and complete housing counseling.

 

According to the letter, recovery from an economic event involves reestablishing “satisfactory credit” for at least 12 months. Criteria for satisfactory credit include 12 months of good payment history on payments such as a mortgage, rent, or credit account.

 

The new guidance is for case numbers assigned on or after August 15, 2013, and is effective through September 30

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How does a Foreclosure, Deed-In-Lieu of Foreclosure & Short Sale Seller’s Credit Affected?

Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Isaac says the average points lost on a FICO score are as follows:

  • 30 days late: 40 to 110 points
  • 90 days late: 70 to 135 points
  • Foreclosure, short sale or deed-in-lieu: 85 to 160
  • Bankruptcy: 130 to 240

Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same, says David Steep of Vitek Mortgage. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale
Steep maintains that the effect of a short sale (providing the sellers are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale seller with a previous FICO of 720 could see it fall from 520 to 420.   If your loan stays current during a short sale, your credit will not be effected as much as not making your payments and your chances of purchasing another home sooner than two years is possible.

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Fannie Mae and Freddie Mac Short Sales and Deeds-in-Lieu up 27% in 2nd Quarter

Nearly 31,000 borrowers with Fannie Mae (FNMA) and Freddie Mac (FMCC) loans forfeited their homes through a short sale or deed-in-lieu of foreclosure during the 2nd quarter of 2010.  This is a 27% increase over the 24,000 transactions completed during the 1st quarter of 2010.

During the same period last year there were 11,700 transactions up from 3,000 the year before.

 Federal Housing Finance Agency (FHFA) also reported that loan modification and refinancing by FNMA and FMCC were up in the second quarter.  The Home Affordable Modification Program (HAMP) increased 65% while refinancing under the Home Affordable Refinance Program (HARP) increased by 30%.  Loan servicers completed 171,200 permanent loan modifications on these types of loans thru HAMP and nearly 88,600 borrowers in HAMP trials transitioned to permanent modifications bringing the two companies HAMP numbers to nearly 225,000.  FHFA’s report also stated that approximately 202,000 of the borrowers were in a HAMP trial period at the end of the 2nd quarter, compared to nearly 448,100 at the end of the first quarter.  That means minus the 88,600 permanent modifications 157,500 homeowners’ HAMP trials were cancelled as a result of missed payments or inadequate documentation. 

FHFA also noted that more than ½ of the modifications completed in the 2nd quarter lowered borrowers’ monthly payments by more then 30%.  During this same period the two companies initiated 275,100 new foreclosures, an increase of 12%.  Completed foreclosure sales and 3rd party sales totaled 112,400, up 15% from the previous quarter.

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