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FHA’s “BACK TO WORK- EXTENUATING CIRCUMSTANCES PROGRAM” Relaxes FHA Qualification Guidelines

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On August 15, 2013, the Federal Housing Administration (FHA) relaxed its three (3) year waiting period on foreclosures and other “economic events” which would have heretofore prevented a borrower from qualifying for a loan for the purchase of a primary residence.   For FHA case numbers assigned on or after August 15, 2013, a homebuyer with prior credit problems can apply for an FHA insured mortgage loan. 

 

Mortgage insurance, which is required on all FHA loans, is provided by homebuyers in order to insure the lender against  a loss resulting from  a foreclosure.  For more information regarding FHA mortgage insurance and other requirements relating to FHA loans, please see my prior blog articles.  FHA mortgage insurance is generally available for any loan which is made by an approved FHA lender  and meets minimum standards of the FHA Mortgage Guidelines. 

 

Prior to the “Back to Work-Extenuating Circumstances Program,” FHA waiting periods for qualification for a new loan for the purchase of a primary residence were 3 years after a foreclosure, short sale, or deed in lieu of foreclosure, 2 years after discharge from a Chapter 76 Bankruptcy,  and  1 year after discharge from a Chapter 13 Bankruptcy.  Under the prior FHA Underwriting Guidelines, a lender “may” grant an exception to the 3 year requirement if the foreclosure was a result of documented  “extenuating circumstances” completely beyond the control of the borrower, such as a serious illness or the death of a wage earner and the borrower has reestablished his or her “good credit” since the foreclosure.  Divorce is generally not considered an “extenuating circumstance,” with the exception of a borrower whose loan was current at the time of the divorce, the ex-spouse received the mortgaged property in the divorce, and the loan was later foreclosed upon.  The inability to sell the property due to job transfer or relocation  is not an “extenuating circumstance” under the prior guidelines.

 

Effective August 15, 2013, under the “Back to Work-Extenuating Circumstances Program,”  a borrower who has experienced the following “economic events:” a pre-foreclosure sale, short sale, deed in lieu of foreclosure,  foreclosure, Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, loan modification, or forbearance agreement, may qualify for this program where their financial/credit issue(s) are a result of  unemployment or an extreme reduction in income.   To qualify, a borrower must have 1) experienced one of the foregoing “economic events,” 2) demonstrate full recovery from the “economic event” by showing a 1 year history of perfect payment on major account, 3) complete housing counseling prior to closing, and 4) show that “household income” declined by 20% or more for 6 months during the “economic event.”  Therefore, a buyer who could not qualify prior to August 15 could nowqualify to purchase a primary residence using an FHA insured loan 12 months after an “economic event.”  However, the borrower must still qualify for the loan with an FHA qualified lender under other FHA Guidelines as applied by that lender.

 

While this is good news for potential homebuyers who have experienced an “economic event,” but have now recovered from those hard times and for realtors who have clients in need of housing who qualify under this program, the borrower must undergo the scrutiny of the lender’s qualification process,  it is too soon to determine how flexible lenders will be allowed to be in qualifying borrowers for the purchase of their new home.

 

For other informative articles relating to current real estate topics please visit our blog and the FAQ section of our website atwww.calvinmcbridelaw.com.


From our offices in Decatur, Alabama, we represent clients in Morgan, Madison, Cullman, Lawrence, and Limestone Counties, including the communities of Decatur, Huntsville, Madison, Hartselle, Cullman, and Athens.

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