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Chances of FHA Approval After Deed in Lieu

by K.C. Hernandez

The number of home buyers using Federal Housing Administration loans increased tenfold as a result of the housing market collapse, according to the New York Times. The FHA has a lower down payment and relatively flexible qualifying guidelines, making it a popular option for borrowers with credit challenges. A borrower who waits a sufficient amount of time after a deed in lieu of foreclosure has a chance at FHA approval if he also meets minimum credit and income criteria.

The Basics

Lenders make loans directly to borrowers, which the FHA insures and promises to repay in the event of borrower default. The government insurance program allows lenders to finance riskier borrowers, such as individuals with derogatory credit in the recent past. A deed in lieu of foreclosure is a serious credit misstep which is considered the same as a foreclosure when it comes to your credit score, according to the MyFICO website. A deed-in-lieu conveys the property's ownership to the lender, allowing the borrower to forgo the foreclosure process.

Seasoning

Lenders require borrowers to wait a certain amount of time after derogatory credit events such as bankruptcy, foreclosure, short sale and deed in lieu of foreclosure. The FHA's seasoning requirement after a deed-in-lieu is three years. Lenders may grant exceptions to the three-year seasoning rule when the borrower can document that an extenuating circumstance beyond his control lead to the deed-in-lieu. Acceptable circumstances include the serious illness or death of a wage earner.

Credit

The borrower must re-establish good credit after a deed-in-lieu, according to HUD. The FHA sets minimum credit score guidelines but lenders may impose more strict standards on top of FHA's benchmarks: these stricter standard are known as "overlays." For example, the FHA has a credit score requirement of 580 to qualify for a 3.5 percent down payment and 500 for a 10 percent down payment. Many lenders, however, require at least a 640 score to qualify for an FHA loan. Whether a borrower has established good enough credit to qualify depends on a particular lender's overlays.

Considerations

A deed-in-lieu occurs when a borrower cannot afford to keep his home due to a long-term financial hardship, including unemployment or physical injury. To get a new FHA loan, you must demonstrate stable employment and income for at least the past two years. As such, a borrower must recover from his previous financial hardship and re-establish himself financially to reassure the lender that he is unlikely to default again, which may take longer than the three-year waiting period.

Photo Credits

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