Back to Work: How the new FHA Loan Guidelines Apply to Foreclosures and Short Sales

August 23, 2013

In recent blog posts we’ve explored a new FHA program called Back To Work, which allows lenders to be more lenient with credit requirements for borrowers who have experienced what the FHA terms an Economic Event. Borrowers who have a qualifying Economic Event under Back To Work may be able to get an FHA mortgage in spite of negative credit data that lender determines does not realistically affect the borrower’s ability to afford mortgage payments on the FHA loan.

The FHA’s Back to Work program rules are described in FHA Mortgagee Letter 2013-26, which states, “FHA is 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.”

The Economic Events in question may include qualifying bankruptcy filings, collections, judgments and other situations up to and including foreclosure and short sales. Let’s examine what the FHA rules for Back To Work say about borrowers who have a foreclosure or short sale on their recent credit history.

“Economic Event-Related Mortgage Foreclosure

The lender must verify and document that:

a minimum of twelve (12) months have elapsed since the date of foreclosure or deed-in-lieu; and
the foreclosure or deed-in-lieu was the result of the Economic Event.”

When it comes to Short Sales, the rules are similar:

“Economic Event-Related Short Sale

The lender must verify and document that:

a minimum of (12) months have elapsed since the date of sale; and
the short sale was the result of the Economic Event.”

What does it mean for the lender to evaluate these circumstances to see if they are considered part of the Economic Event? According to FHA Mortgagee Letter 2013-26, “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.”

Additionally, FHA loan rules state, “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.”

Do you have questions about FHA home loans? Ask us in the comments section.

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Back to Work: How the new FHA Loan Guidelines Apply to Foreclosures and Short Sales

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