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FHA: “Back to Work”

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Posted On: 02/05/2014

Question : We did a short sale on our home in May 2012. We then bought a house with cash in October 2012. Can we get a new mortgage on our current home?

Answer : A short sale is a situation where a home has been sold for less than the mortgage debt, meaning the lender has taken a loss. As you can imagine, this is not a result that thrills lenders.

Unfortunately, there are several factors that will prevent an instant refinancing in your situation.

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But, the good news is that it may be possible to get a new loan in a few months.

First, because you had a short sale, your last loan is seen as a “not paid as agreed” account for credit-scoring purposes. This will lower your credit as much as a deed-in-lieu of foreclosure or an outright foreclosure.

For many lenders, this is a huge red flag and an instant turnoff.

Second, your short sale took place less than a year ago. You have not had enough time to re-establish your credit as far as the lender’s concerned.

Third, what you want is cash-out refinancing. You’re not seeking a new loan to get a new rate or convert from adjustable-rate financing to fixed. This is another red flag for lenders.

So, what’s the good news?

In August, the Department of Housing and Urban Development announced a new FHA mortgage plan, which, in some cases, can allow troubled borrowers to get financing in as few as 12 months. Under the FHA “Back to Work” program, the government will insure loans for those who have had a negative “economic event,” such as a loss of income or a bout of unemployment.

Prospective borrowers must show that the hard times they encountered were for reasons beyond their control, that their finances have recovered and that they will take an HUD-approved counseling course.

The FHA “Back to Work” program is an opportunity for people hurt by economic events to get mortgage financing again. However, it’s not a free pass.

Expect lenders to review mortgage applications with incredible zeal before giving the OK to applicants with a recent history of financial stress.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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