Exceptions to FHA's "Three Year" Rule. You may just be eligible to obtain a post-foreclosure loan earlier. Here's how.

Posted by Donny Mak on Monday, November 5th, 2012 at 1:00am.

Exceptions to FHA Three Year Rule
By: Alan Aptheker

One of the functions of the Federal Housing Administration, or FHA, is to insure home loans so you’re able to pay less money down, plus, have some more wiggle room if your debt-to-income ratio is a bit higher than the bank’s typical threshold to approve a loan.  If you’ve gone through a foreclosure, it is widely known that at least a three year “cooling off” period is required before you can obtain another FHA loan. Not always the case.  There are exceptions, and not many folks know about them.

Here’s one.  The lender may be willing to grant you an exception to the “three-year” rule if your foreclosure was the result of an “extenuating circumstance,” that is, beyond your control. Example: a serious illness or death of a main bread winner is an extenuating circumstance in the eyes of the FHA. And if you’ve re-established good credit since that foreclosure, you may qualify. 

In certain rare cases, a divorce can be an extenuating circumstance. For example, you had a mortgage that was current when you divorced, your ex-spouse got the property, and the loan was later foreclosed on, the bank may consider you still eligible for an FHA loan. 
The same three year rule typically applies to short sales, but there are some little known exceptions here as well. If your payments were current at the time of a short sale, you could be eligible for a new FHA loan if, from the date you applied for the new loan, all your mortgage payments on the old mortgage were made in full and on time in 12-month period, (as well as any  installment debt payments to the bank that you were responsible for). 
Typically, if you are in the midst of defaulting on your mortgage at the time of the short, you would not be eligible for a new loan. Again, there are exceptions. For example, (as with a foreclosure), the death of a primary bread winner, or if you’ve sustained a long-term illness for which you were not insured, and had to incur large health care payments, as long as you had good credit before you became ill. Even a long-term job loss or, getting laid off could be considered an exception, since is was not in your control.
An FHA loan might be your best option even if you think you may not qualify. Ask a mortgage professional, or your lending institution. There are exceptions to every rule. You just have to be aware of them. 

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