Under new FHA rules, bad credit can still get you a mortgage

Mortgage lenders are students of history.

They’ve learned that when people haven’t paid their bills, it’s likely that practice will continue.

The past is prologue – except when there are extenuating circumstances. The federal government doesn’t want people who’ve missed bills through no fault of their own to be kept from buying a home.

Enter the FHA’s “Back to Work” program, which has begun to allow people with serious dents in their credit history – a foreclosure, bankruptcy, short sale, or deed-in-lieu of foreclosure – to be approved for a new government-backed mortgage just 12 months after the negative event.

“Normally it takes three to five years [after one of the above] to be eligible” for a new FHA mortgage, notes Heather Shanahan, director of program development at Springboard, a housing and credit counseling nonprofit.

But, if you can show that your household income decreased by 20 percent or more because of a loss of a job, or because you own a business that suffered, or you’ve had your hours cut, you may qualify for a FHA mortgage, says Shanahan, provided you’ve paid bills regularly for at least 12 months after one of these credit stains.

“I haven’t heard of a lot of borrowers using this program,” observes Don Frommeyer, president of The Association of Mortgage Professionals. “The financial crisis began several years ago. For many, it’s been years ago when they were laid off.”

But it can take a couple of years of missed payments before a foreclosure actually occurs, counters Shanahan, who says Springboard has seen “a steady stream” of people taking the first step – an hour long phone credit counseling session – from a HUD-approved counseling agency [visit hud.gov for a list of agencies].

Lenders also want to see proof of timely rent payments, Shanahan says. For example, if after the loss of a home people lived with friends or family, it will be difficult to be approved, she explains.

— Marilyn Kennedy Melia

© CTW Features

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