In its August 2013 Mortgagee Letter, the Federal Housing Administration (FHA) issued updated guidelines for giving an FHA-insured mortgage to borrowers who may otherwise be ineligible as a result of its post-bankruptcy, foreclosure or short sale waiting period.
For the majority of FHA-insured mortgages, the guidelines are fairly straightforward:
- The borrowers monthly debt should not exceed 45% of their household income, unless exceptional cause is shown,
- The borrowers must put down at least 3.5% of the purchase price or appraised value (whichever is less),
- The borrowers must have a credit score of at least 580 or higher, and
- The amount of the loan cannot exceed the local FHA loan limits.
However, under the prior guidelines, if a borrower filed for Chapter 7 Bankruptcy, or underwent a foreclosure or short sale, the mandatory waiting period for borrowers to obtain another FHA-insured mortgage were as follows:
- Foreclosure: Must wait for 3 years before eligible
- Short Sale in Default: Must wait 3 years before eligible
- Chapter 7 Bankruptcy: Must wait 2 years before eligible
Due changes in the housing market, these mandatory waiting periods have now essentially been waived. The FHA will, however, require that borrowers prove:
- That any major credit issues have been cleared from their credit history,
- Completion of housing counseling, and
- They meet all other HUD requirements.
This has the potential of introducing more buyers into the housing market, thereby driving demand for more housing inventory and increasing home values. However, it also begs the question……is this opening the door for another housing crisis in the years to come?