Big Shoes To Fill With FHA's Back To Work Program

Announced in 2013, the FHA Back To Work Program allows  a buyer repurchase a primary home again just 12 months after a foreclosure, short sale or a deed in lieu of foreclosure. Extended through September 30, 2016, program aims to fulfill a lofty goal-offering families a second chance at homeownership. The proof however, is in the pudding as you’ll need to specifically document the economic event among other credit characteristics that caused the forfeiture of your prior home…

Factors To Weigh In

In order to qualify for the FHA Back To Work Program, thresholds are in place to ensure the previous forfeiture of the home was truly due to circumstances beyond the control of the homeowner. Previous loan modifications, adjustable-rate loans recasting, inability to rent a previous income property, even divorce are not considered satisfactory explanation when trying to buy post event in the last 12 months.

Loss of income-more specifically, buyer needs to show a 20% loss of income or more for at least six consecutive months. For example if the previous foreclosure, short sale or deed in lieu happened due to loss of income, this threshold is met so long as pre-event income meets the 20% rule. Let’s say pre-event income $100,000/year income dropped to $80,000 or lower for six consecutive months, this passes.

How to support claim -lender whom you’re applying with will order a verification of employment. The verification of employment would support the dates of when the loss of income occurred. Other supporting documentation would include lower year-to-date earnings with pay stubs within the dates loss income dropped. Lower reported wages supported with W-2s and/or tax returns to supporting the dates also would suffice to meet the FHA requirement.

Full Recovery With Satisfactory Credit- FHA wants you to demonstrate you’re back on both feet. You’ll need to show that since the previous financial calamity, you have re-established your income and have satisfactory paid your other obligations.

How to support claim- you’ll need a credit score of at least 640 and have gone through a HUD approved counseling agency related to homeownership and residential mortgage loans.

Tip: a twelve month favorable credit rating on your other obligations would support a 640 credit score.

Missing The FHA Second Chance Boat

These requirements set by the FHA, draw a clear line in the sand between showing specific related documentation that caused the previous credit obstacle. If a buyer who has a previous foreclosure, short sale or deed in lieu of foreclosure is unable to provide a clear delineated loss of income for six consecutive months documenting  a 20% decline, getting qualified again will be problematic and here’s why…

The nature of lending in today’s credit environment still involves uncovering all questions and history related to the borrower’s credit, debt, income and assets. A simple letter of explanation detailing the events that led to the event is simply not enough because of the fact supporting documentation needs to corroborate the story to the naked eye.

If  the short sale, foreclosure or deed in lieu of foreclosure took place within the last 12 months -most recent last 36 months

Then: a documentable loss of income of 20% or more for six consecutive months remains in effect

If the short sale, foreclosure or deed in lieu of foreclosure took place 36 months ago or longer

Then:  the previous loss of income documentation threshold need not apply and a borrower would be eligible for a new FHA loan  so long as the credit, debt, income and assets are acceptable with the lender- previous house loss does not automatically preclude ability to qualify.

If the short sale, foreclosure or deed in lieu of foreclosure took place 36 months ago or longer

Then: the lending requirements are as follows; conventional loan with 20% down (to avoid PMI) seven years or three years with documentable extenuating circumstances and a lender exception, on a VA loan 36 months out from last date of event, on a USDA loan 36 months out from date of last event, on a Jumbo mortgage that is a loan amount bigger than the maximum conforming high balance loan limit (Sonoma County’s is $520,950), most lenders require seven years from a foreclosure or a deed in lieu or a short sale with 30% down 36 months out or longer.

In most cases, a consumer purchasing a primary residence again would wait for 36 months to get an FHA fixed rate mortgage unless supporting documentation delineates the loss of income time frame and buyer has met the other re-establishment conditions required by the FHA.

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