New Mortgage Guidelines Give Borrowers Hope Following A Short Sale or Bankruptcy

Laying Down the Law

Charles, Christopher updated

By Christopher J. Charles, Esq.


Borrowers have struggled for years to find financing following a short sale or foreclosure.  In fact, the general rule is that a borrower must wait anywhere from two to five years after a short sale before qualifying for a new mortgage.  Even worse, borrowers generally must wait five to seven years following a foreclosure or bankruptcy before qualifying for a new mortgage.
Fortunately for many borrowers, however, FHA recently announced its new “Back-to- Work” program that allows borrowers to qualify for a mortgage within one year following a short sale, foreclosure, or even bankruptcy.

To qualify for this new program the borrower must:

(1) have a minimum credit score of 620; and

(2) demonstrate “extenuating circumstances”; in other words, the borrower must show that he or she experienced an “Economic Event that resulted in a severe reduction in income due to a job loss or other circumstances resulting in reduced household income.”

Rolf Monson with Homeowners Financial Group recently closed two new mortgages under the new FHA Back-to-Work program.  The first scenario involved a plumber who was involved in a terrible car accident in the summer of 2010 that resulted in an above-the-knee leg amputation.  Because of his injuries, the plumber lost his job in late 2010 and subsequently lost his home to foreclosure and had to file bankruptcy.  He has since gone back to work and improved his credit score notwithstanding the foreclosure and bankruptcy.

The second scenario is worse. The borrower’s wife passed away on Thanksgiving in 2011 due to illness.  Because the wife earned half of the couple’s income, the husband could no longer afford their mortgage and he lost his home to foreclosure.  After the foreclosure he downsized and successfully rebuilt his credit.

The borrowers in both of the above cases successfully qualified for FHA financing less than two years after their foreclosure or bankruptcy because they successfully demonstrated “extenuating circumstances” and reduced income.
It is unclear what other scenarios will also meet FHA’s definition for “extenuating circumstances,” but certainly a job loss, demotion, or pay decrease should qualify.

Further, the borrower must show: (1) the income reduction was beyond the borrower’s control; (2) a full recovery from the Economic Event; (3) and completion of housing counseling.

To summarize, following FHA’s new guidelines, as long as a borrower has a decent credit score and “extenuating circumstances,” a borrower may now qualify for FHA financing just one year after a short sale, bankruptcy, or foreclosure.
This is wonderful news since interest rates are still relatively low.  Without this new policy, waiting two to seven years could literally cost hundreds of thousands of dollars as interest rates continue to increase.

Of course FHA financing comes with restrictions.  For instance, the lending limits for FHA financing is about $346,000 in Maricopa County.

But even with these restrictions, these new guidelines come as a welcome relief to those who have been trying to purchase a home in the last few years.

Better late than never!

If you or someone you know would like additional information regarding borrowers’ options following a short sale or foreclosure, please call Attorney Christopher J. Charles today.  Christopher Charles is an experienced real estate lawyer and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”).  He has an “AV Preeminent” rating by the Martindale-Hubbell Peer Review Ratings system, which connotes the highest possible rating in both legal ability and ethical standards.


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He is a Partner with the law firm Davis Miles McGuire Gardner, PLLC where he serves as the chair of the Real Estate Practice Group. Mr. Charles is an Arbitrator and Mediator for the AAR regarding real estate disputes; he serves on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.  Mr. Charles is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. For a list of upcoming speaking engagements, please visit  He can be reached at


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