A reader question came in recently asking about the possibility of getting an FHA home loan following a deed-in-lieu of foreclosure (DIL) action. “Is a deed-in-lieu derogatory on a credit report?” was one of the questions. The answer to that is that yes, a deed-in-lieu is considered a negative on your credit report. But FHA loans do offer some hope for borrowers who have since the deed-in-lieu established good credit once more.
FHA loan rules in HUD 4000.1 cover the requirements in these circumstances for single-family “forward mortgages” after a deed-in-lieu of foreclosure, and those rules include mandatory waiting times or “seasoning periods” following the DIL.
When can a borrower apply for a new FHA home loan after a deed-in-lieu? According to HUD 4000.1:
“A Borrower is generally not eligible for a new FHA-insured Mortgage if the Borrower had a foreclosure or a DIL of foreclosure in the three-year period prior to the date of case number assignment.”
The waiting period start date is sometimes a confusing issue–when does the clock start ticking for the borrower in these cases? HUD 4000.1 states that the three year mandatory waiting period starts, “on the date of the DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.”
How long it may take to transfer ownership back to the foreclosing entity is an entirely separate issue and is not addressed in this section of the FHA loan rulebook. Borrowers may find that it can take longer than expected to transfer the ownership back–something to keep in mind when considering your options.
The three year rule mentioned above does have some exceptions, according to HUD 4000.1:
“The Mortgagee may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the foreclosure.”
Such circumstances are subject to FHA loan rules and lender standards. For example, divorce, and an inability to sell the home prior to a relocation move are not considered under this exception as a factor:
“Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a Borrowers Mortgage was current at the time of the Borrowers divorce, the ex-spouse received the Property, and the Mortgage was later foreclosed. The inability to sell the Property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.”
Each situation is considered on a case-by-case basis, so your individual circumstances will definitely be a consideration. Also, a borrower’s other credit activity in the months and years after the deed-in-lieu are also considered.
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