UPDATE Sept 9, 2013: I just received a memo from our management and we are doing FHA’s “Back to Work” program for home buyers who meet the criteria.
HUD released Mortgagee Letter 2013-26, also referred to as “Back to Work” featuring enhanced guidelines for home owners who lost their homes via short sale or foreclosure due to financial difficulties. “Back to Work” shortens the required wait periods for borrowers wanting to buy a home again. From ML 2013-26:
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale [short sale], deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit have been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability to repay a mortgage.
Before you get too excited, please keep in mind that although HUD and FHA recognize these hardships and are willing to allow borrowers who have faced these hardships to buy again before the current waiting periods, we are waiting to see if lenders will embrace these guidelines. Just because HUD and FHA (or Fannie or Freddie) have certain underwriting standards, does not mean that all banks or lenders have to offer them. It’s not a law – it’s a guideline.
Currently, if a borrower wants to buy again after a foreclosure or short sale, FHA has a 3 year wait period from the date of the sale. However, if a borrower has a short sale and was not delinquent on their mortgage or installment debts for 12 months preceding the short sale, there is no wait period to buy again using FHA. “Back to Work” will allow borrowers to buy again in 12 months following a foreclosure, short sale or bankruptcy (Chapter 7 or 13). Housing counseling is a requirement.
In order to qualify for “Back to Work” (assuming lenders embrace ML 2013-26 guidelines), the borrower must meet specific criteria. The borrower must be able to document (prove):
- their delinquencies were a result of an “Economic Event” (loss of income or employment) that was out of the borrowers control.
- show the loss of income was at least 20% reduction in household income for a minimum of six months. NOTE: Household income is considered all income earning members of the household at that time – even if those parties are not part of the proposed loan application.
- derogatory credit must have taken place after (not before) the “Economic Event”
- credit history needs to reflect no late payments in the last 12 months (one 30 day late on non-mortgage accounts is allowed).
- no collections with exception to medical or identity theft.
Borrowers need to be able to illustrate they had good credit prior to the job/income loss (Economic Event) and that the derogatory credit events (foreclosure, short sale, bankruptcy, late payments, etc.) took place because of the loss of income (ie the bad credit is only during that time period). And last, but not least, they need to demonstrate that over the last 12 months, they have re-established their credit and employment.
Again, we’re waiting to see which lenders will accept HUD’s new guidelines allowing home owners who suffered loss of employment to buy a home again in 12 months instead of 36 months. If you are someone who lost your home to foreclosure due to a “strategic default”, these guidelines will not apply to your circumstance.