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How to Qualify for a Second Chance Loan for New Home Buyers from FHA

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 first time home buyers. With the economy improving, we are hearing talk of eased standards and lightened requirements on many FHA home buyer loans.

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 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

This second chance loan program first was announced in 2013 and recently was extended through September 2016 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.

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. 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 program:

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

To qualify you will need to show the following:

Loss of Income

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 month 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 second 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:

  • 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 get a second chance loan. 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 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 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 FHA loans. 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, loan modification that could drop the interest rate or extend the loan term to lower the payment. provides a news and information service by offering editorial content related to the housing and mortgage industry.
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