In August the Federal Housing Administration (FHA) made big news when they opened up a new program for those prospective home buyers that were victims of the Great Recession and the ensuing housing collapse, and thus were forced to make the difficult decision to either sell their home via the short sale process, or foreclose completely, and turn their home back over to the mortgagor.
The program is called “Back to Work – Extenuating Circumstances Program”, and many are excited to be given the opportunity to forego the typical 3 year waiting period for foreclosure, and 2 year waiting period for Bankruptcy.
Already we’ve seen a ton of interest with phone calls and e-mails from those wondering and hoping that they might qualify for this new mortgage program, and so in order to shed some further light on the logistics of this program, I’ve put together the following “Frequently Asked Questions” piece.
HUD Mortgagee Letter 2013-26 Back to Work – Extenuating Circumstances
Frequently Asked Questions:
Q: What is the extenuating circumstance referred to in this Mortgagee Letter?
A: Any occurrence beyond the borrower’s control that results in loss of employment, loss of income, or a combination of both which causes a reduction in the borrower’s household income of 20% or more for a period of at least 6 months.
Q: How do you verify the extenuating circumstance?
A: A letter of explanation from the borrower is not sufficient.
For loss of employment the following must be obtained:
- A written VOE evidencing 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.
For loss of income the following must be obtained:
- Signed tax returns or W-2 evidencing prior income, or
- A written Verification of Employment (VOE) and income, evidencing prior income
- For loss of income based on seasonal employment, the lender must 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 first two requirements.
- For loss of income based on part-time employment, the lender must verify and document a two year history of continuous part-time employment just prior to the loss of income in addition to meeting the first two requirements
Q: What are the Housing Counseling requirements?
- Must be completed a minimum of 30 days but no more than 6 months prior to submitting a loan application to the lender. For affordable housing programs that require counseling, the borrower will still be required to complete the above counseling requirement prior to application to meet the requirement.
- Receive counseling or a combination of homeownership education and counseling provided that each participant receives, at a minimum, one hour of one-on-one counseling from HUD-approved counseling agencies. The counseling must address the cause of the economic event and the actions taken to overcome the even and reduce the likelihood of reoccurrence.
- HUD approve counseling agencies can be found at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
Q: What are the requirements for a self-employed borrower?
A: The borrower must document a two year self-employment history PRIOR to the hardship to show income consistency, plus the documentation required above (except for the W-2) showing the decline in income.
Q: Are the counseling requirements different from the standard first-time home-buyer counseling requirements?
A: Yes. The counseling must be specific to the borrower’s situation. We are hearing that many HUD approved counseling agencies are currently not equipped to counsel borrower on specific situations, so at this time it may be difficult to meet this part of the requirement. The best advice I can give at this point is to use the link above from HUD’s website, for all counseling agencies available and call through the list to find a counselor that can assist you. Be sure to ask the agency if they have been able to put together a specific counseling class for FHA’s Back to Work Program.
All in all, there really isn’t all that much required of prospective borrowers who want to step back into homeownership earlier than expected, and as long as one can document the issues that led to their Bankruptcy and/or Foreclosure, then becoming a homeowner again will not be difficult.
However, the one area that may still prove to be difficult for those who’ve went through these issues in the past will be repairing their credit profile. Just because you’ve done a Bankruptcy, doesn’t mean that your credit report is now nice and clean. Maybe folks are surprised to find out that certain creditors are still reporting erroneous information, which ends up weighing down their scores, and many find out that even their past mortgage that foreclosed on is still reporting incorrectly, etc. so it’s important that you contact a mortgage professional who knows how to circumvent these issues, and help you increase your credit scores if needed. Most mortgage lenders require a minimum of a 640 credit score to qualify for this program.
In terms of the minimum credit standards FHA is requiring to qualify for this program, they are as follows:
- Your 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
As always, please feel free to call me with any questions you may have about qualifying for this program.