FHA Renders THREE the Magic Number to Buy a Home After Foreclosure

FHA Foreclosure Guidelines

Are you looking to buy a home after foreclosure and would like to know the FHA foreclosure waiting period? FHA foreclosure guidelines render THREE a magic number.

“Three Is a Magic Number” was one of the original songs from the Schoolhouse Rock! Series that aired on Saturday mornings during the ‘70’s.
The first verse of the song says:

Three is a magic number,
Yes it is, it’s a magic number.
Somewhere in the ancient, mystic trinity
You get three as a magic number.

For the numerous US households that experienced a foreclosure in recent years and want to buy a house again, three is a magic number.

According to realtytrac.com, there were 1,285,873 properties with foreclosure filings in the United States in 2007. The western states of California, Colorado, Arizona and Nevada all posted foreclosure rates among the nation’s top 10 in 2007, and all these states documented more than 1 percent of their households entering some stage of foreclosure during the year.

With a total of 481,392 foreclosure filings on 249,513 properties during the year, California documented the highest number of foreclosure filings and the most properties in some stage of foreclosure in 2007. The state’s 2007 foreclosure rate — 1.9 percent of its households entering some stage of foreclosure during the year — ranked fourth highest among the states.

Nevada posted the nation’s highest state foreclosure rate for 2007, with 3.4 percent of its households entering some stage of foreclosure during the year — more than three times the national average.

It can be logically assumed that the majority of these households did not move far from their foreclosed homes. Many of them are working on maintaining or salvaging their credit history in hopes of again becoming eligible for a mortgage loan despite their foreclosure.

2007 Foreclosure Map

Why is Three A Magic Number for FHA Mortgages?

FHA guidelines state that the minimum waiting period is three years for a borrower whose house has been foreclosed or who has given a deed-in-lieu of foreclosure. This is a much shorter waiting period than that which is required by Fannie Mae (5 to 7 years).

During the three years they are waiting, it is imperative that the households re-establish credit. My recommendation – although every credit scenario is different – is that they maintain at least three open credit accounts without late payments. If any of the accounts are revolving (e.g. credit cards), the account balance should be maintained below 33% of the limit in order to maximize the account’s positive impact on the three credit scores.

FHA loans also have a low and flexible down payment requirement which helps overcome another significant barrier to entry to re-homeownership. The current minimum down payment required under FHA guidelines is 3.5% (ok, not exactly three, but close enough). Compare this to the Fannie Mae minimum requirement of 10% for a buyer with a previous foreclosure.

Finally, three is a magic number because IRS guidelines define a first-time homebuyer as any individual (and spouse if married) who has not had present ownership interest in a qualifying principal residence during the previous three-year period. As a result, a household that can use an FHA loan to buy another home three years after foreclosure can typically take advantage of first-time homebuyer programs and incentives such as the existing $8000 first-time homebuyer tax credit that was recently extended to April 30, 2010.

The past and the present and the future … give you three as a magic number.

For the many households that have experienced foreclosure in recent years, FHA’s three-year post-foreclosure waiting period offer a faster route to re-homeownership.

Please contact me with questions.

Steve Lines
Authorized FHA Loan Consultant and Co-Branch Manager
480-344-3662 (direct)
480-329-3346 (mobile)
slines@bestfhalender.com (email)
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