On August 15, 2013, the Federal Housing Administration (FHA) moved to relax its guidelines for borrowers who “experienced periods of financial difficulty due to extenuating circumstances”. Dubbed the “Back to Work – Extenuating Circumstances Program”, FHA has now removed the familiar waiting periods that typically followed a derogatory credit event.
With this change, FHA has taken a giant step forward, by acknowledging that the Great Recession that started in late 2007, and lasted almost 5 years, forced many responsible Colorado homeowners into mortgage loan default and/or bankruptcy, and realizes that sometimes, certain events may be beyond one’s control.
Ex-Homeowners, who lost their homes to a short-sale, deed-in-lieu, foreclosure, and/or had to claim bankruptcy because of an extenuating circumstance, or circumstances, are now eligible to purchase a new home in as little as 12 months after a one or both of these events, and FHA has confirmed that they will waive their waiting requirements of 3 years for a foreclosure related (short-sale and deed-in-lieu) event, and 2 years for someone who discharged their debts via a bankruptcy.
FHA “Back To Work” Program Becomes Official
With this new program, FHA is committing to fully evaluate mortgage applicants who have experienced periods of financial difficulty due to extenuating circumstances. As a result of the recent recession many Colorado homeowners who experienced unemployment or other server reductions in personal income, were unable to make their monthly mortgage payments, and in many instances, this led to losing their homes to a pre-foreclosure short-sale, deed-in-lieu, or foreclosure.
Some were then forced to file for bankruptcy to discharge or restructure their remaining debts, and in many cases a bankruptcy was the only protection to avoid their previous mortgagee coming after them for any deficiency balance left over after their foreclosure event. Because of these issues, these ex-homeowner’s credit histories may not fully reflect their true ability or propensity to repay a mortgage loan.
To that end, FHA is now allowing for the consideration of borrowers who have experienced an “Economic Event” and can document that:
- certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income, beyond the borrower’s control;
- the borrower has demonstrated full recovery from the event; and,
- the borrower has completed housing counseling via a HUD approved housing counseling agency.
FHA mortgage insurance will now be available for any loan which meets the following two conditions:
- The loan must be made by an approved FHA lender
- The loan must meet the minimum standards of the “FHA Mortgage Guidelines”
Qualifying for the “Back to Work” Exception
You may be eligible to qualify for the “Back to Work” exception if:
- You experienced a 20% loss of household income for a minimum 6 month period
- Your loss of income created an economic event such as bankruptcy, foreclosure, short sale, or loan modification.
- You can show a (timing) correlation between the loss of income and the hardship
- You can show that you have recovered from your hardship with 12 months of timely payments
In order to qualify for the back to work exception, you have to show that the financial hardship is in the past and not likely to occur again.
Satisfactory Credit encompasses specific requirements that must be documented prior to this exception being granted:
- You credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
- Any open mortgage is current and shows twelve (12) months satisfactory payment history. Mortgages that have been brought current through loan modifications, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s); and
- You meet all other HUD requirements for qualifying for an FHA insured mortgage
Your lender must verify and document a minimum 20% reduction in your household income for a period of at least six months that resulted from a loss of employment, loss of income, or a combination of both.
To verify and document a Loss of Employment:
Lender receives a written Verification of Employment (VOE) showing the termination date, or in cases where the prior employer is no longer in business:
- a written termination notice, or
- other publicly available documentation of the business closure, and
- documentation of receipt of unemployment income.
To verify and document a Loss of Income:
Your lender will need to verify and document your Household Income prior to Loss of Income by obtaining:
- a written VOE evidencing prior income; or
- signed tax returns or W-2s evidencing prior income
For a Loss of Income based on seasonal employment, your lender will need to verify and document a two year history of seasonal employment in the same field just prior to the Loss of Income, in addition to meeting the documentation requirement above.
For a Loss of Income from losing a part-time job, the lender will need to verify and document a two year history of continuous part-time employment just prior to the Loss of Income in addition to meeting the documentation requirement above.
Housing Counseling Requirement
A requirement of establishing Satisfactory Credit following an Economic Event, boomerang buyers looking to use the Back to Work Extenuating Circumstances exception must complete Housing Counseling from a HUD approved housing counseling agency.
Extenuating Circumstances Exception participants must:
- Receive homeownership counseling or a combination of homeownership education and counseling provided that each participant receives, at minimum, one hour of one-on-one counseling.
- Counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of that event or reoccurring.
- Counseling must be completed a minimum of thirty (30) days PRIOR TO LOAN APPLICATION but no more than six (6) months prior to submitting a loan application to a lender.
Housing counseling may be conducted in person, via telephone, via internet, or other methods approved by HUD. For a list of HUD approved counseling agencies in Colorado, you can view online here –HUD Counseling Providers Online , or call 1(800) 569-4287.
Where to Start?
Envoy Mortgage is a Colorado direct mortgage lender that helps buyers who have had past issues with foreclosures and/or bankruptcies navigate through the process of buying after such events.