August 21, 2013
We’ve been taking a look at the new FHA loan guidelines for lenders who are working with borrowers who have had what the FHA terms an “economic event” that affects credit but may not necessarily be a good indication of a borrower’s ability to repay an FHA mortgage loan. FHA Mortgagee Letter 2013-26 describes an FHA program known as Back To Work.
The mortgagee letter was issued in order to, in the words of the FHA, “provide minimum underwriting standards and criteria for evaluating borrowers who have experienced an Economic Event, as defined in this ML, that resulted in a severe reduction in income due to a job loss or other circumstances resulting in reduced Household Income; describe the use of housing counseling to qualify under the provisions of this ML; amend HUD Handbook 4155.1, Chapter 4, Section C to add an Economic Event to the list of examples of extenuating circumstances and instruct lenders to use the guidance for Back to Work – Extenuating Circumstances established in this ML as Chapter 6 Section G, to underwrite an applicant with an Economic Event”.
In order for a lender to consider an FHA loan applicant for the Back To Work program, the borrower’s economic event must be reviewed. Then the borrower’s recovery from that event must be reviewed. Here’s what the FHA says about the process:
“An Economic Event is 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 twenty (20) percent or more for a period of at least six (6) months. The Onset of an Economic Event is the month of Loss of Employment/Income. Recovery from an Economic Event is the re-establishment of Satisfactory Credit (as defined on page 5 of this ML) for a minimum of twelve (12) months.”
During this review the lender is required to evaluate any negative credit information to determine whether that information was a result of the economic event or a simple inability to manage finances properly.
“The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.
To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:
- the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
- the borrower’s derogatory credit occurred after the Economic Event Onset, and
- the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months.”
So you can see the new rules do allow a borrower to apply for a new FHA mortgage if it’s determined that the borrower does meet the economic event criteria and meets the other requirements of the FHA loan program. There are special provisions under the FHA Back To Work program that apply to foreclosure and bankruptcy-we’ll examine those in our next blog post.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: