There is an interesting trend lately in the real estate market. Most of the countries in the United States are five to seven years out from the peak, and the major cities are actually into the upswing with regards to home prices. The distressed homeowners of the years before are already becoming the home buyers of today.
The rules with regards to qualifying for a mortgage vary widely from different lenders and loan programs. However, one of the most often used loans as of the moment is the FHA mortgage. The FHA mortgage requirements for foreclosures and bankruptcies are the following: a foreclosure that was discharged three years ago, and a bankruptcy discharged two years ago.
Most of the initial reactions by the crowd to this situation is somewhat expected. People have certainly seen enough of the lending and lax credit practices during the previous boom-bust cycle. And for the current situation, it seems like an invitation to more.
The details for how these home buyers must qualify diverges from the way sub-prime home buyers were qualifying for loans during the past years. The new practices today create far greater protections for the lender and the American public. The home buyers with either foreclosures or bankruptcies on their records need to show a consistent history of clear credit since the time of their foreclosure.
Other FHA Requirements
- On-time bill payment for all credit accounts since foreclosure or bankruptcy
- A credit score of 640; to make it to such score, responsible credit use is necessary to gain it 3 years out of the foreclosure
- A verified down payment, which is 3.5 percent higher
- Upfront and ongoing mortgage insurance
- Significantly low debt-to-income ratios
Underwriters scrutinize these borrowers’ loan applications more than the average home buyer. On the other hand, during the time of the real estate boom, a buyer could get a mortgage loan approved with very little credit history to support it.
The Sub-prime Mortgage Approvals at the Height of the Real Estate Boom
- 580 credit score
- 100% financing or 80/20 1st or 2nd mortgages
- Foreclosure 2 years out
- Bankruptcy 2 years out
- No income verification
- Total debt ratio up as high as 60 percent
Although the lending changes do not satisfy all critics, there are also a number of mitigating factors that underwriters take into consideration. Remember that although a home buyer’s foreclosure may have been closed three years ago, the banks often take a couple of years to push a foreclosure through. The owner may have handed the home back to the bank earlier and been repairing credit ever since. Underwriters can also consider this.
Also, take not that there are several different situations that lead to a foreclosure. Some buyers overspent or walked away from a bad investment. Of course, these will be viewed in a negative way by the lender. Others have lost their homes because of job loss, divorce, deaths in the family, and many significant life changes.