If you’ve gone through a short sale, foreclosure, bankruptcy, or deed-in-lieu, you no longer need to wait to apply for an FHA-backed loan, as long as you meet several minimum eligibility requirements.
The Federal Housing Administration (FHA) published guidelines for its “Back to Work – Extenuation Circumstances Program” on August 15th which allows borrowers who lost their homes due to a loss in employment or income to be eligible to apply for an FHA-backed mortgage in as few as 12 months after a short sale, bankruptcy, foreclosure, or a deed-in-lieu.
The publication of this program offers a much needed second chance for people who have gone through financial hardship to buy a home again.
The recession has caused many homeowners to experience unexpected financial hardship. Many of these homeowners fell behind on their mortgage and credit card payments, and their credit rating was severely negatively affected. Before these changes, borrowers were required to wait two years after a bankruptcy and three years after a short sale or foreclosure to be eligible for an FHA loan. Now that the FHA has loosened its restrictions, these homeowners are able to apply for a mortgage and take advantage of record low interest rates.
Qualifications for FHA Back to Work Program:
Under the program, borrowers who experienced what FHA calls an “Economic Event”—the loss of employment, income, or a combination of both, which caused a reduction in the borrower’s income of 20% or more for at least 6 months—resulting in the loss of their home, will be considered for an FHA-backed mortgage as long as they can document:
- They had good credit prior to the event, and that the event caused the bad credit
- The borrower has completed housing counseling
- The borrower has fully recovered financially from the event
Lenders will determine if a borrower’s credit is satisfactory if their credit history is clear of late debt payments and any open mortgage is current and shows 12 months of on-time payment history. For borrowers with non-traditional credit history (i.e., items that don’t normally appear on credit reports), borrowers must have no history of late rental payments and no more than one month late payments on other debts.
Housing counseling must come from a HUD-approved housing counseling agency and be completed at least 30 days but no more than 6 months before applying for a loan.
Back to Work Program Good for Housing
This is welcome news for the housing market. FHA loans are a good source for many borrowers with credit issues or less than 20% for a down payment, so it’s important that more borrowers who were hit hard by the recession and have since recovered won’t be forced to wait to enter the market. Before these guidelines were published, there were few options for borrowers to get a loan so soon after doing a short sale or foreclosure. For instance, under certain circumstances, borrowers can get a VA loan within a year after a short sale, but this option is only available to veterans.
We applaud FHA for recognizing that when an unforeseen financial hardship affects homeowners, they can still repair their credit, get their finances back in order, and are willing and able to pay a mortgage. These guidelines will allow more people to purchase a home again.
Borrowers should keep in mind that not all lenders will be participating in the program and not everyone will qualify under the FHA Back to Work Program. It’s too early to say how lenders will react and what exactly they will offer borrowers.