As a result of the housing collapse, many homeowners experienced a serious reduction in income or lost their jobs due to the crumbling economy. Some mortgage borrowers were forced to file bankruptcy or short sale their home to avoid foreclosure. Others were not so lucky and lost their home on the courthouse steps. Borrowers may now qualify for an FHA mortgage under new guidelines established by the Department of Housing and Urban Development (HUD), according to Eli Younes of Viking Mortgage in Pembroke Pines on Monday.
The new HUD rules allow borrowers whose credit was damaged due to a temporary loss of employment or income to qualify for an FHA mortgage if they have substantially recovered from that situation and maintained a positive credit history for at least 12 months. Borrowers who recently experienced a bankruptcy, foreclosure, short-sale, loan delinquencies, deed-in-lieu, debt collections or other situation negatively impacting their FICO credit score may now be able to qualify for an FHA loan.
Recognizing that any number of events may have impacted a borrowers’ credit rating, the Federal Housing Administration (FHA) believes that such catastrophic event does not mean they are not financially stable or unable to make a mortgage payment. As such, the previous 3-year waiting period required by the FHA on financing a new home has been revised.
“Referred to as the ‘Back to Work’ initiative, this program is designed for borrowers who lost their home through foreclosure, short sale, bankruptcy or deed in lieu and also suffered a 20% or more loss in household income,” Eli Younes of Viking Mortgage told Examiner. “As with most FHA loans, this program only requires a 3.5% down payment and is applicable for all purchase loans other than the Home Equity Conversion Mortgage.”
In order to qualify for a mortgage under the “Back to Work” initiative, there are several steps that must be taken to prove an “Economic Event” that was beyond the borrower’s control.
The lender must verify that the borrower lost at least 20% or more in household income - or became unemployed - for a period of six months prior to the foreclosure, short-sale, or deed-in-lieu. To verify loss of income, the lender must request a written Verification of Employment to show the termination date or loss of income, receipt of unemployment compensation, or signed W-2's and tax returns detailing the reduction in earnings.
To demonstrate a loss of income for part-time or seasonal employment, the borrower must prove a 2-year history in the same field prior to loss of employment. Borrowers will also be required to prove that they have fully recovered from their hardship, increased earnings and have maintained other credit obligations for a period of 12 months following foreclosure, short sale, bankruptcy or deed in lieu.
When evaluating a borrower for the “Back to Work” initiative following a foreclosure, the lender may deem the borrower eligible if:
1.) The borrower’s credit report is free of any late housing payments within the last 12 months;
2.) All other mortgage accounts must be current for the last 12 months, even if the loan was previously modified to avoid a foreclosure action;
3.) The borrower’s credit report contains no more than a single 30-day delinquency on payments due other creditors; and
4.) The borrower’s credit report contains no current collection accounts or public records. This condition may be waived in instances of identity theft or borrower’s with medical collections.
1.) Chapter 7 Bankruptcy: One year must have elapsed since the bankruptcy discharge. Proof must also be shown that the bankruptcy filing was the result of an “Economic Event” covered within the FHA program guidelines.
2.) Chapter 13 Bankruptcy: Most lenders will require that the bankruptcy filing be discharged with all payments required under the agreement having been made on time. For borrowers currently in bankruptcy, written approval from the court allowing them to enter a new mortgage contract is required.
Housing Counseling Requirement:
For purposes of establishing satisfactory credit following an “Economic Event,” mortgage borrowers’ under the “Back to Work” initiative must:
1.) Receive homeownership counseling or a combination of homeownership education and counseling, at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies, as defined at 24 C.F.R. §214.100. The counseling must address the cause of the 'Economic Event" and the actions taken to overcome it as well as reduce the likelihood of reoccurrence; and
2.) Be completed a minimum of thirty (30) days but no more than six (6) months prior to submitting a loan application to a lender, as application is defined in Regulation X, implementing the Real Estate Settlement Procedures Act, 24 C.F.R. §3500.2(b).
The housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an online course. It may be conducted in person, via telephone, via internet, or other methods approved by HUD, and mutually agreed upon by the borrower and housing counseling agency.
Rules for Renters:
Under certain circumstances, renters may qualify under the “Back to Work” initiative. For purposes of establishing satisfactory credit, mortgage borrowers must:
1.) The borrower’s credit report is free of any late rental payments within the last 12 months;
2.) The borrower’s credit report contains no more than a single 30-day delinquency on payments due other creditors; and
3.) The borrower’s credit report contains no current collection accounts or public records. This condition may be waived in instances of identity theft or borrower’s with medical collections.
Prior to the proposal of new mortgage guidelines, the FHA had considerably shorter waiting periods for borrowers who had gone through foreclosure or bankruptcy than for conventional mortgages. In the past, borrowers could be approved for a new FHA mortgage in as little as three years after a foreclosure or two years following a Chapter 7 bankruptcy.
A foreclosure, short-sale, Chapter 13 bankruptcy or deed-in-lieu will continue to plague a borrower’s credit report at the Equifax, Experian and TransUnion consumer reporting agencies for a period of seven years. A discharged Chapter 7 bankruptcy will remain on the credit report for a period of ten years.
“As a result of the recession many homeowners experienced unemployment or unforeseen circumstances and were not able to make their monthly mortgage payments,” Carlos J. Reyes, a foreclosure defense attorney with the Reyes Law Group in Fort Lauderdale, told Examiner. “I’m glad to see that the FHA has recognized the financial hardship faced by many borrowers and is allowing them to once again attain the American Dream through homeownership.”
The new guidelines take effect immediately and will be in force through at least September, 2016.