November 17, 2017

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FHA Home Loans, Deed-In-Lieu, Foreclosure: A Reader Question

FHA loanHow do actions like deed-in-lieu of foreclosure or actual foreclosure affect borrowers and their chances at getting new FHA home loans? A reader asks:

“I have a bankruptcy filed and discharged in 2012. My 1st and Heloc were not reaffirmed. I will be moving out of California and to Arkansas but want to know how FHA would look at the wait for purchasing if I:

    1. Surrender property in deed in lieu, or
    2. Allow the home to be foreclosed upon.

Also would it make a difference if I applied before foreclosure is final since it is not reporting on my credit report (I would not be making payments if this is the scenario and staying with family)?”

It is hard to answer questions like this without addressing certain implications or ambiguities. What follows is not an assumption on our part that the reader is (or isn’t) contemplating courses of action mentioned below, but rather a discussion of FHA loan rules as they pertain to situations that could arise based on theoretical conditions.

To begin with, FHA loan rules are clear when it comes to new FHA home loans after foreclosure, or deed-in-lieu of foreclosure. From 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. This three-year period begins on the date of the DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.”

There are some exceptions. HUD 4000.1 says new FHA home loans after foreclosure/DiL may be possible without the above mandatory waiting times, “…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.”

HUD 4000.1 points out that divorce or the “inability to sell the Property due to a job transfer or relocation to another area” will not qualify as an “extenuating circumstance”.

Borrowers who may be tempted to apply for an FHA mortgage loan before a foreclosure happens should know that there are many instances of home loans that were terminated by the lender after the initial credit check due to changes in the borrower’s financial circumstances. The lender is required to make sure the borrower is a good credit risk, and that verification may not end just because the initial credit check was passed.

Additionally, it is generally not advised to come to the FHA loan process with fewer than 12 months of on-time payments for all financial obligations. Anything less may jeopardize the borrower’s chances for home loan approval when it comes to FHA home loans.

Again, we are not implying what the reader in this case might do, already has done, or is planning to do, but rather referencing the relevant passages of the FHA home loan rule book, HUD 4000.1 based on information provided in the question. In addition to all that’s mentioned above with respect to FHA home loans, state law and lender standards may also apply.

Joe Wallace - Staff Writer

By Joe Wallace

May 15, 2017

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was managing editor for www.valoans.com for (8) years and is currently the “Associate Editor” for FHANewsblog.com for over (3) years.

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