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“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 Arizona households that experienced a foreclosure in recent years and want to buy a house again, three is a magic number.

According to Default Research Inc,  recent foreclosure statistics for Maricopa County (the location of Phoenix, Scottsdale, Tempe, Mesa, Chandler, Gilbert, and more) are as follows:

2006: 8,972 foreclosures
2007: 22,426 foreclosures
2008: 60,860 foreclosures

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.

Why is Three A Magic Number for FHA Mortgages?

FHA states 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 had no present ownership interest in a qualifying principal residence during the previous three-year period. As a result, Arizona households 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
Serving Mesa, AZ and all of the Phoenix Metropolitan Area
480-344-3662 (direct)
480-329-3346 (mobile)
slines@bestfhalender.com (email)
www.bestFHAlender.com (my blog)
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