FHA reduces the foreclosure, short sale, bankruptcy waiting period to buy again with their Back to Work – Economic Event acceptable extenuating circumstance to help boomerang buyers qualify and buy again in as little as 12 months.
This provision essentially waives the regular two or three waiting period FHA had in place prior to this announcement
Mortgagee Letter 2013-06 outlines the details that are effective through September 30, 2016.
Why is FHA Doing This?
FHA realizes the credit scores for many borrowers who experienced unemployment or other severe reductions in income and lost their home to foreclosure, short sale, or had to file bankruptcy does not reflect their current true ability or willingness to repay a mortgage.
President Obama said “We should give well-qualified Americans who lost their jobs during the crisis a fair chance to get a loan if they’ve worked hard to repair their credit and have strong recent pay histories, access to FHA financing”.
What Qualifies as a ‘Back to Work Economic Event’ Extenuating Circumstance?
A Back to Work – Economic Event is an occurrence beyond the borrowers control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrowers Household Income of 20% or more for a period of at least 6 months.
Prior to this announcement, FHA would not consider loss of job or reduction of household income a circumstance beyond a borrowers control….that is why this is such big news!
Conditions to Receiving the Economic Event Exception
Receiving loan approval using the Economic Event circumstance is not an automatic deal. Borrowers will have to provide a lot of documentation and qualify under FHA’s more restrictive Manual Underwriting guideline that caps the DTI ratio at 43% in order to qualify sooner than the published waiting periods.
(FYI – most mortgage lenders no longer do manual underwrite approvals like our bank will)
Can You Demonstrate Full Recovery from Your Economic Event?
- Regained a decent paying job/income (show stability)
- Complete a housing counseling program
- Re-established satisfactory credit for a minimum of 12 months
- Fully document (prove) the delinquency or derogatory credit, including collections/judgements, was the result of the Economic Event
- Meet all other FHA requirements under the Manual Underwrite approval guidelines
Note: Only the income of the borrower, not the household income (non-borrower), may be considered affective income when qualifying for the new loan.
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