Back To Work_FHA Mortgage After Bankruptcy, The New Improved Rules


In announcing the new rules, FHA Commissioner Carol Galante stated:

As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage”.

Effective August, 15, 2013, the Federal Housing Administration (FHA) is allowing borrowers who went through a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale to reenter the market in as little as 12 months, pursuant to a 15 page mortgagee letter titled Back to Work – Extenuating Circumstances.

The FHA insures mortgages, it does not make mortgages. The point is this: that investors, including banks, mortgage companies and credit unions make mortgages which may be insured by FHA. These investors also make overlaying rules known as underwriting guidelines to manage their risks or perceived risks. FHA cannot insist that an investor must approve any mortgage applicant.


Prior to this new FHA policy, borrowers who went through the foreclosure process had to wait three years following the foreclosure sale date before getting the opportunity to qualify for an FHA loan. However with the new guideline, certain borrowers who lost their home as a result of an economic hardship may be considered eligible earlier. To be qualified under the shortened foreclosure timeline, twelve months must have lapsed since the date of title transfer to the foreclosing lender.

Recession Related Financial Event

The Back to Work program will require prospective borrowers to comprehensively document the nature of the “Economic Event” (Event).  It will be necessary to show the Event is that which resulted in derogatory credit, and that there has been a satisfactory recovery from the Event pursuant to the new guidelines. 

The Event to have caused the derogatory credit is defined as a reduction in income or loss of employment with at least one of the following:

  1. A written termination notice.
  2. Other publicly available documentation of the business closure.
  3. Documentation of the receipt of Unemployment Income.

Further, it must be proved that the prospective borrowers had satisfactory credit prior to the Event onset and that the prospective borrowers’ derogatory credit occurred after the onset of the Event.

Additionally, the Event caused a reduction in the borrower’s household income of 20 percent or more for a period of at least six months.

Recovery from the Economic Event

  1. Prospective borrowers (prospects) have reestablished satisfactory credit for at least 12 months since the end of the Event.
  2. Prospects have no thirty day late housing or installment debt payments for the past 12 months.
  3. Open mortgage accounts are current and have been paid on time for the past 12 months.
  4. Prospects must obtain a HUD Counseling Agency certificate of participation in pre-purchase counseling. At minimum, this is a one hour of one-on-one counseling provided by HUD-approved housing counseling agencies. This counseling must be completed a minimum of 30 days but no more than six months prior to submitting a loan application to a lender.

While FHA says it has realized that, sometimes, credit events may be beyond one’s ability to control, and that credit histories don’t always reflect a person’s true ability or willingness to pay on a mortgage. We shall see if this program truly offers benefits for homeownership prior the program’s termination on September 30, 2016 or if it is a merely a program of limited utility. My hope is on the former.

Image attribution

Financially Speaking™James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | September 1, 2013 | Updated September 2015

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

16 comments on “Back To Work_FHA Mortgage After Bankruptcy, The New Improved Rules

  1. Maggie says:

    Hi James,
    I wrote recently about adding my fiance to my credit cards to help him rebuild his credit after he lost his home to a foreclosure and ch 13 bankruptcy following a disastrous divorce. We were hoping to be able to buy the house we love and have called home for the past 3 years. I did add him to my credit cards, and we started the pre-qualification process through a mortgage broker we know. Unfortunately, we had a very rude shock (and havegotten quite an education) when the credit check revealed that Ocwen has been reporting my fiance as delinquent on his mortgage payments for the past –many– months. This should not be the case, and would be possible to remedy with persistence and tenacity, but the bigger horrific discovery is that he and his ex are *still on title* to the house they believed they had lost to foreclosure *five* years ago. So we are now among the thousands of former homeowners who are on the receiving end of the latest chapter in the seemingly-unending housing nightmare, called The Bank Walkaway (or Zombie Title, or Zombie Mortgage). We filed a complaint with the Washington State Attorney General and have consulted an attorney with many years real estate experience (although in our initial conversation, he claimed that this is the first time he’s heard of this, which is a concern) and he’s working on a game plan. we also met with my fiance’s Bankruptcy attorney. The upshot, as I’m sure you’re aware, is that nobody knows how to remedy this. There is nothing that legally compels the bank to take title of the house. My fiance’s ex left the house when she was told to — now people are being told NOT to leave their homes until the house is actually sold. It appears that, in our case, they did attempt to sell the house at a trustee’s sale, but the sale did not go through. We went to check, and the house has now been broken into and vandalized. We went to the police department and were told we could not enter the house, maintain it, or fix the broken locks. My fiance is now legally liable for a house he *technically* owns, but apparently has no control over. As far as we’re concerned, the bank can’t have it both ways — they need to “fish or cut bait”. But, of course, getting them to move in *either* direction, when it is not in their financial interest to do so, is going to prove difficult at best. As in many of these cases, my fiance was never notified that the bank had halted (or suspended) foreclosure proceedings. Both he and his ex assumed the house was gone (they surrendered the property as collateral in the ch 13), and the house was not included in their divorce, as everyone assumed it was gone. In hindsight, of course, it was an assumption that should not have been made — though many, many people have made the same assumption and are now caught in the same bind. After my fiance’s ex moved out there was a notice posted on the front door that said the home was vacant and that the bank would maintain it — there are dates noted where they sent someone out to check on the house, but it appears they have not been out for over a year. The bank has been paying the property taxes. What a nightmare! We are now hoping for the best but preparing for the worst — this could be a long haul. The new FHA guidelines are encouraging, but the lenders, we discovered, are not nearly as lenient. Obviously, we can’t do anything until we can figure out a way to get off the title. The “good behavior” clock doesn’t start ticking until *after* the foreclosure sale, which may never happen…which means we can’t buy a house, can’t get married, can’t fix his destroyed credit. My sweetheart is not a man who did a “strategic foreclosure” because of declining property value. He let the house go and filed for bankruptcy because he had no choice following his wife’s illness, the loss of her job and then the her going completely off the deep end. These things *do* happen to good, responsible people. Sigh… this is such a mess and I feel such sympathy for everyone who has been affected by the chain of events that led so many into this morass. As I write this, my landlord is now and default and is selling the home we wish we could buy and stay in, but probably won’t be able to. My fiance has an excellent job and good income, and we would have no trouble qualifying otherwise. To be honest, I’m questioning the wisdom of entering into a mortgage agreement with any bank at this point. I’ll post what I learn along the way as we attempt to untangle this mess. Thanks again, James, for an excellent blog!


    • James Spray says:

      Thanks for your update, Maggie. We are hopeful you and your legal counsel are able to find the silver bullet to kill this Zombie Mortgage once and for all. I’m sure Ocwen must be maintaining the property to the satisfaction of municipal or county codes. If not, perhaps your attorney can help bring local government pressure upon them? The only other suggestion I have is to file a complaint with the CFPB on Ocwen’s failure as a servicer to foreclose on the property (long shot at best but mortgage servicing is the latest hot button with CFPB). In all events, please let us know what you learn as you progress. Our best thoughts are with you.


  2. David Autry says:

    Hello James,
    Here’s my situation and have been unable to get a definitive answer regarding Chapter 7 and 13. I filked for Chapter 7 in 2009 and discharged in 2010. The majority of my debts were past due Income Tax. Now my years 2000, 2001, 2003, 2004 and 2005 were discharged in my BK 7. However my 2002 was not evfen though the IRS released the lien in 2011. Now they are saying I owe them approx 25,000 because they filed for me 150 is the code in 2005. However I filed my 2002 on April 13th, 2006 and didn’t file my BK 7 until August 2009. The IRS filed an amended return on April 10th, 2006 and the Solvency dept has told me 3 times that since they filed an amended return before I filed on my own that 2002 is not dischargeable. I have met all 5 of the reguirements to have them discharge and other rules and even my attorney says they should have been discharge like my other earlier years. Am I missing something? Also now it has been over 4 years since the filing of my Chapter 7 and I still owe $54,000 approx to the IRS and the IRS is willing to do the Fresh Start Program for $675.00 per month over 5 years which is a lot of money and my attorney is advising to do a Chapter 13 now for $480.00 per month over 5 years. I am self employed and have paid off all my credit card debt and have not been late on a payment in 4 years. I am married but she has nothing to do with my IRS debt prior to our marriage and on disability. The only thing negative on my credit report now are my tax liens and my FICO is 680 up front 480 when I filed. Also I’m afraid since my only expenses are rent, food and utilities that the BK 13 will want a higher monthly payment? And if I can convince the IRS that they are wrong about not discharging my 2002 IRS debt for $25,000 then I wouldn’t even consider chapter 13 because then I would owe only $29,000 and could definitely pay that off avioding chapter 13. What are your thoughts and how can I get someone to help me with the IRS situation. I am getting the run-around.




    • James Spray says:

      Hello David –

      I am quite familiar with the situation you are facing. This is the IRS Substitute Filed Return (SFR) which the New York Times reported in 2012 as the Ghost Tax Return. It is almost impossible to overturn a SFR (even though I did just that many years ago). The simple fact is this: Given the return was not filed any underlying liability could not be discharged. Verily, the lien may have been dismissed (for reasons unrelated to the tax liability) but the underlying debt survives due to the SFR.

      Your solutions are limited. As you have been rebuilding your credit, before filing bankruptcy talk with an tax attorney (avoid the TV stars and check with your local/state Bar Association for a real lawyer) to discuss a lump sum Offer In Compromise (OIC) or even a lesser monthly payment plan than you’ve negotiated. Do not try OIC alone, you are not an expert and you will end up hurting yourself. Get specialized legal help – this is one of those things one does not do without highly specialized legal/IRS counsel.

      Finally, if all else fails, you can always use the bankruptcy card again. But use this card only as a last resort. You appear to have the cash on hand to make a settlement and avoid being a multiple filer.

      I wish you the best.



      • David Autry says:

        I did file my own taxes and after they filed. They are saying that since they assessed me 3 days before I filed on there own return that it is not dischargeable. What are the rules if I filed my own return which I did.


      • James Spray says:

        You filed after they did. It’s a classic SFR situation.


      • David Autry says:

        Yes I did file on April 13th, 2006 after they originally filed on my behalf which was in 2005. But three days before I filed they did another assessment on my 02′ taxes. Everywhere I have read states that if I file even after the IRS filed the SP that as long as I waited at least 240 days from my BK filing date of 08/09/2009 even if they did the SP IN 05′ that it would qualify for discharge? So are you saying which is not what I’ve read that if they file the SP before I file then they automatically are non-dischargeable? That’s all I need to know then and I will talk with a Tax Attorney who can advise me on whether to file BK 13, Installment plan or Offer and Compromise?

        Thank you


      • James Spray says:

        Correct, the SFR is non-dischargeable unless you can get the Service to accept a new return in it’s place. This is not remotely easy. But let’s say you are able to so do then you need the 2 years seasoning plus the other requirements before you can file Chapter 7 to Discharge.


  3. David Autry says:

    Update I meant to say they Assessed my return on April 10th, 2006 and I filed my 02′ returns on April 13th, 2006 3 days after there assessment. They are telling me since they assesed me 3 days before my own filing of 02′ this is why they are non-dischargeble? The customer service for IRS agrees with me but it’s the Solvency dept that has to admit to a mistake if htere was one?


    • James Spray says:

      Based on the evidence you’ve presented, there was no mistake on behalf of the IRS Solvency unit. It is what it is. See below.


      • David Autry says:

        So even though I did file my own return in 02′ and waited until 2009 to file BK 7 more than the 240 days than required I still owe the 02′? That’s the big question and worth $ 25.000, If that’s the case then I should file BK 13 just to reduce my payment because the Fresh Start program won’t allow a payment negotiation according to the IRS? The law clearly states that if I file my own return and the taxes due are more than 3 years old and were filed by me more than 2 years ago and 240 days have passed before I file BK 7 then they are dischargeable? Am I missing something. They actually discharged my 05′ and that was an error and should not have been.

        Thanks for your advice and do appreciate it.


      • James Spray says:

        You are telling us two different things. One that you filed in 2002 and the other that you filed the 2002 returns in 2006. In your words, “they Assessed my return on April 10th, 2006 and I filed my 02′ returns on April 13th, 2006 3 days after there (sp) assessment.” It can’t be both. With all due respect, reread the suggestions I made on how to deal with your situation.


  4. David Autry says:

    One last bit of information, I did file my 02 in 2003 like I was supposed to, however my returns were lost even though the State received their’s. I have my copy of 02 returns but unfortunately they are not dated so I can’t prove it.


  5. David Autry says:

    Thank you James and yes the IRS did accept my return in 06. I contacted a tax attorney and will speak with him on Monday. Thanks have a great week-end.


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