To make it easier for once-struggling homeowners to qualify for a mortgage, the Federal Housing Administration (FHA) is reducing the amount of time that home buyers must wait after a bankruptcy, foreclosure or short sale before they can qualify for an FHA-backed mortgage from two years to one year.
Previously, the waiting period had been two years after the completion of a bankruptcy and three years after a foreclosure or a short sale.
The shortened time frame to qualify, however, only applies to consumers who are able to prove that their bankruptcy stemmed from unemployment or another ‘economic event’ that caused their household income to fall by 20% or more. They also must prove they have had at least one hour of approved housing counseling and must have completed 12 months of on-time housing payments.
"FHA recognizes the hardships faced by these borrowers and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage," Carol Galante, commissioner of the FHA, wrote in an Aug. 15 letter to mortgagees announcing the changes.
FHA-backed mortgages are a popular option for first-time buyers and consumers with low credit scores who might not otherwise qualify for a loan backed by Fannie Mae or Freddie Mac.
However, the agency has recently increased the fees tied to FHA-backed loans. In particular, it is now requiring most borrowers to carry FHA insurance for the entire life of the loan, in addition to raising insurance fees. Previously, homeowners only had to carry the insurance until they reached 80% loan-to-value.
The ailing FHA is facing up to $5 billion in losses this year and may need a bailout totaling up to $1 billion in order to shore up its reserves. Most of the losses were incurred when millions of homeowners took out reverse mortgages, via the agency's reverse mortgage or HECM program, opted to take lump sum payments and then ran into financial problems. The agency, which is required by law to maintain reserves equal to 2% of its portfolio, currently has about $32 billion in reserves.
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