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How to Qualify for Second Chance Mortgage Loans for FHA Home Buyers

Consumers who sold their home in a short sale or had a foreclosure usually have to wait three years to buy another home with an FHA-guaranteed mortgage, AKA second chance loan. However, FHA does now offer what it calls its Back to Work Program that offers other loan options for FHA first time home buyers. With the economy improving, we are hearing talk of eased standards and lightened requirements on many second chance mortgage loans insured by FHA.

There are millions of consumers that need home loans for bad credit so if you have had some issues it may help to know that you are not alone. Before investing a lot of time in shopping rates, it is important that you get a better idea of credit standards and your eligibility on FHA first time home buyer loans for bad credit.

This convenient second chance loan program allows some buyers to purchase another primary home only 12 months after a serious financial problem, including:

  • Pre-foreclosure sales
  • Short sales
  • Deed-in-lieu
  • Foreclosure
  • Chapter 7 bankruptcy
  • Chapter 13 bankruptcy
  • Loan modification
  • Forbearance agreements

These second chance loans were first announced in 2013 and recently was extended through 2018 and may be extended again. FHA offers this program for some buyers so that they can quickly own their own home again and not spend years renting a home. Find bad credit loan programs for first time home buyers. Ask about new rules and law changes that could affect you getting a home loan after a bankruptcy.

How to Qualify for 2nd Chance Loans Insured by FHA

This program is open to many former homeowners who have had financial difficulties recently. However, the major sticking point is that the buyer needs to carefully document the financial issues that caused them to lose their home. FHA first time home buyers need to show that they lose their home due to conditions that they could not control. The following reasons are NOT considered as sufficient reasons to qualify for this second chance mortgage program: Make sure to ask your FHA lender for a mortgage pre-approval letter.

  • Adjustable rate loan recasting
  • Divorce
  • Inability to rent an income property

To qualify for a second chance mortgage insured by the FHA you will need to show the following:

Loss of Income

With most second chance loans, you must show at least a 20% loss of income for at least 6 months in a row to qualify for this program. For instance, if your foreclosure happened because of loss of income, you could meet the requirement if your income was $100,000 and dropped to $80,000 or less for six months in a row. To support your claim, your lender will request a verification of employment. This data needs to show the dates when the loss of income happened. Other documentation should include a lower year to date earnings total supported by your paystubs. You also can show W-2s or tax returns to show lower reported wages for the six months or more time period.

Fully Recovery with Good Credit

FHA wants to see that you are back on your feet financially before giving you a second chance. You must show that since the previous financial problem that you have reestablished your income and have paid your creditors on time. To support your claim, you will need to have a FICO score of at least 640,or go through a HUD-approved financial counseling program. Also, you should have a 12-month steady payment history on your current credit obligations.

second chance loans

Not Everyone Qualifies

FHA requests specific documentation that shows your loss of income. If you had a foreclosure or short sale and cannot show that you had a clear 20% loss of income for at least six months, it is hard to qualify. The reason for this is that FHA and lenders want to see complete documentation of what caused your financial issue by looking at credit, debt, income and assets. If you cannot show that you had a serious drop in income, then FHA and brokers assume that your financial problems are more due to irresponsibility than forces outside your control. A last chance loan can be an excellent opportunity for a homebuyer with a recent financial problem to get back on the home ownership track quickly. Top 8 Reasons Home Buyers Get Turned Down for a Mortgage Loan.

More About FHA

An FHA home-loan is a program that is guaranteed by the Federal Housing Administration. If you pick a FHA program, you must pay for mortgage insurance, which will protect the lender from a loss if you default on the loan. Many Americans prefer FHA because down payments can be as low as 3.5% and the program features low FHA interest rates, given the fact that the mortgage is guaranteed against default by FHA. Below are more facts about the government program for second chance loans:

  • Minimum credit scores with FHA are reasonable, with a person with a FICO score as low as 580 able to qualify. If you have a credit score under 580, you need to make a 10% down payment.
  • Minimum down payment is 3.5%, which is a major boon for potential home owners, and you can acquire that down payment as a gift from your family.
  • Closing costs may be included; FHA allows sellers, builders and lenders to pay some of your closing costs. These can include appraisal, credit report and title costs. Lenders usually charge a higher rate if they pay closing costs.
  • Your lender has to be approved by FHA for you to qualify for second chance loans. Remember that FHA is not a lender itself; it is just a government backed insurer of your loan. Not every lender that offers government programs offers similar last chance loan products and interest rates. It is in your best interest to shop around.
  • All FHA programs have two mortgage insurance premiums built in that protect the lender against default. The premium that you pay upfront is 1.75% of the loan amount, which is $1,750 for a $100,000 loan. You pay this when you get the loan, but it can be wrapped into the mortgage. The other is an annual premium that is paid every month. The cost of this mortgage insurance varies depending upon the loan term, how much borrowed and loan to value.
  • You can borrow cash with an FHA home buyer loan to make repairs; this is known as a 203(k) loan. This loan is based upon the projected ARV (after repair value) of the home, not on the appraised value. You can use this loan to finance up to $30,000 in nonstructural repairs to a home.
  • Financial hardship relief is allowed with second chance loans insured by FHA. Some loan servicers can offer relief options to borrowers who have an FHA mortgage and have suffered a financial hardship. The lender could issue a period of forbearance, last chance loans or mortgage modification that could drop the interest rate or extend the loan term to lower the payment.
  • In most instances, the FHA does not offer a no-doc home loan, but the streamline refinance program has a lot of similarities to a traditional state income mortgage program.
FHA First time Home Buyer

9 Top Reasons FHA is Best Loan for First Time Home Buyers in 2018

People with less than perfect credit and less money for a down payment often consider getting an FHA loan to buy their home. What is an FHA first time home buyer loan and what is so good about the? Keep reading to learn why you may want to use an FHA loan as a first time home buyer.

FHA Loan Overview

FHA home loans are backed by the Federal Housing Administration, a part of the US Department of Housing and Urban Development. This means that the loan is backed against your defaulting on the payments. If you were to stop paying on the mortgage, the US government would pay back the lender most of the loan principal.

The government guarantee makes more lenders willing to offer loans to borrowers who may not have the best credit or 20% to put down on their first house.

Today FHA loans make up more than 20% of the US loan market. These second chance mortgage options became particularly popular after the mortgage meltdown of 2008.

So that is the basics of the FHA loan product. But let's delve into the details and explain why the FHA second-chance mortgage is so great for the 1st-time home buyer:

#1 Low Down Payments

Many home buyers today are unable to put 20% down on a home. Even a starter home in 2017 can run over $200,000 in many areas. Coming up with 20% down means over $40,000. This is especially difficult for the first time home buyer who lacks equity in a current property.

With the FHA first time home buyer loan, you may get a home loan with only 3.5% down. For a $200,000 loan, you will only need to put down $7500, plus closing costs. Such a low down payment puts buying a first home much more within your grasp.

When you can get into your first home with only 3.5% down, you will be more easily able to fix up the property in a way that you like. Emptying your savings account to put down 20% also puts you at risk of not being able to withstand a financial emergency Learn how to remove PMI from FHA.

So, it is easy to see why a low 3.5% down payment with the FHA loan is so popular.

#2 Low Interest Rates

It surprises many people, but sometimes FHA loans can have a lower interest rate than conventional loans! This is largely due to the fact that the FHA backs the second chance loan. Thus, the lender is able to take the risk by offering you a lower rate. A conventional loan would usually have a higher rate for someone with average or poor credit. But with FHA loans, mediocre credit can still get you a good interest rate.

There are loans in 2017 that are backed by FHA that have a rate around 4%. That is quite a deal for someone with average credit and not a lot for a down payment.

#3 Many FHA Loans Available for 1st Time Home Buyers

FHA backed mortgages come in all shapes and sizes. The most popular loan is the fixed, 30-year loan, but you also can get a 15-year mortgage, an adjustable mortgage, and others.

If you want to buy a home that needs repairs, FHA can give you a 203k construction loan. This will provide you up to $35,000 in funds when you buy the home to make necessary repairs.

If you want to refinance a loan, you also can get an FHA refinance. The good news is if you have an FHA lien currently, you can refinance with FHA's streamline refinance program, if you are not pulling out cash. This allows you to get a lower rate potentially and not have to go through a credit and income check or pay for another appraisal.

#4 FHA Insures Most Types of Property

People who get FHA loans can buy most types of property in the United States or US territory. You can buy a single-family home, two-unit house, three-unit house, four-unit house, condo, manufactured or mobile home.

#5 Flexible Credit Standards

Many potential home buyers are shut out of the market because they have average or poor credit. Most conventional lenders will not work with people who have a credit score under 680. And if you even can get a second chance loan with a low credit score, they usually will want you to put 10% or more down.

The great news with FHA loans is that you can get a loan fairly easily with average or poor credit. You just need to be able to prove that you have the income to pay back the loan.

Many people are able to get an FHA loan with fairly poor credit. If you have 640-credit, you will have little problem getting an FHA loan if you have the income to support the monthly payments. There are even cases where a family with credit scores under 600 can get an FHA loan. Credit this low will require you to shop around several FHA-approved lenders, but you may be able to find one that will approve you.

#6 FHA Has Extended Loan Amounts

There are loan limits to what FHA will insure. But fortunately, FHA limits can be increased in certain higher cost areas of the US. In Orange County, CA, for example, you can buy a home with an FHA first time home buyer loan up to $625,500. If you are buying a multi-unit property, you can get an FHA loan in some areas up to $1.2 million.

#7 FHA Loans Can Be Assumed

Very few people know that FHA first time home buyer loans can be assumed. This means that if you are selling your home and the buyer qualifies, your FHA second chance loan can be taken over by the other party. This can be a very attractive benefit in certain markets. As of 2017, rates are generally on the rise. It is possible in a year or two that rates could be at 5% or higher. You could find it easier to sell your home if you have an FHA loan with an interest rate in the low 4s.

#8 No SSN Needed

FHA does not require buyers to have a valid social security number. FHA guidelines even allow World Bank employees and foreign embassy workers to get FHA loans.

#9 No Pre-Payment Penalties

FHA does not allow brokers, lenders or banks to charge a penalty fee for refinancing or paying the FHA loan off early. This allows borrowers to sell their home or refinance with without having to pay the mortgage company a pre-payment penalty.

FHA second chance loans are some of the best mortgage products on the market today for first time home buyers. You can get into an FHA loan with average or poor credit, and often only need to put 3.5% down. Also, the credit standards are quite flexible, as are debt to income ratios.

The US government wants to encourage people to buy homes because it is generally believed that home ownership leads to more stable neighborhoods and more economic prosperity for the country.

If you have average or poor credit, we advise you to look closely at FHA first time home buyer loans. If your credit is under 640, you will probably need to check with several FHA-approved lenders. Still, you should be able to find a lender who will work with you. It is important to be able to prove with financial documents that you can pay the mortgage, but you should be able to buy your first home with an FHA loan. provides a news and information service by offering editorial content related to the housing and mortgage industry. This site does not make loans for FHA first time home buyers and have no affiliation with HUD, FHA or any other Federal agency. This website is not responsible for the accuracy of information or responsible for the accuracy of the rates, APR or mortgage guidelines posted by advertising banks, lenders and brokers.

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