August 21, 2013
In recent blog posts, we’ve examined some of the new guidelines for FHA borrowers who may have negative credit information on their records as a result of financial difficulties the FHA describes as an “economic event”. The FHA/HUD issued Mortgagee Letter 2013-26 outlining new guidelines for lenders who are working with borrowers affected by such circumstances.
According to the mortgagee letter, “Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.
To that end, 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.”
Additionally, the FHA advises the lender that the new rules are “applicable to purchase money mortgages in all FHA programs with the exception of Home Equity Conversion Mortgages.”
The FHA is now instructing lenders to “use the provisions of this ML when considering a borrower who experienced an Economic Event, as defined in this ML, which resulted in a foreclosure, short sale, bankruptcy or other negative impact on their credit” adding that while added consideration is offered to borrowers in these circumstances, “loans originated using these criteria must meet all other applicable FHA eligibility and policy criteria. Lenders remain responsible for determining whether the borrower meets all other HUD requirements before approving the loan.”
What criteria does the lender use to evaluate the borrower in the wake of an economic event? This is one of the most important aspects of the new rules, as the borrower’s actions following the financial setback directly affect their ability to get an FHA loan.
According to Mortgagee Letter 2013-26, “The lender may deem a borrower to have Satisfactory Credit if:
- the borrower’s 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 may have been brought current through loan modification, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s)”
Furthermore, “The lender must verify and document a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months that resulted from the Loss of Employment, Loss of Income, or a combination of both.”
Finally, the lender is also required to analyze the circumstances of the “economic event”. The new FHA loan rules state, “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.”
We’ll examine that process in another 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.
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