A New Lifeline from FHA

If foreclosure, short sale or bankruptcy closed the door on your homeownership dreams, FHA just opened it back up with their Back to Work program

Typically there has been 2 sets of seasoning requirements for borrower’s with a distressed property sale in their past.  On conventional financing, borrowers must wait a minimum of 2 years from the closing of a short sale or 7 years from the completion of a foreclosure.  On FHA loans, 3 years minimum seasoning has been required for both short sales and foreclosures.
In August, HUD, the office of Housing and Urban Develop (the agency which administers FHA), issued new guideline for lenders providing FHA loans.  In this mortgagee letter, HUD made it possible for borrowers who would otherwise be ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage.

There are a few requirements the borrower must meet in order to qualify for the Back to Work Program.  A few of them are:

 

·         620 minimum credit score

·         The borrower’s total debt cannot exceed 43% of the borrower’s gross income

·         The foreclosure, short-sale or bankruptcy must have been the result of a documented “economic event”.  This may be something like a reduction in employment hours or total loss of job.  Divorce is not considered a qualifying economic event

·         The borrower must have 12 months of perfect payment history after the economic event that lead to the credit challenges

·         Housing counseling is required

 

The housing counseling requirement is to help the borrower prevent a future credit challenge.  The borrower has the right to choose their preferred class, but it must be HUD approved and at least 1 hour in length.  The counseling class can be done via the internet, but must be completed at least 30 days prior to applying for the new mortgage.  The class must address the cause of the economic event, actions taken to overcome the event and reduce the likelihood of it recurring.

This new FHA program is a great opportunity for qualified borrowers who would otherwise not be able to purchase a home until their waiting period elapsed.  Many lenders are not offering this new product so check with your local mortgage bank first.