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.

Foreclosure

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.