Changes to FHA Underwriting: “Back to Work – Extenuating Circumstances” (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 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 has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.
To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:
• certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
• the borrower has demonstrated full recovery from the event; and,
• the borrower has completed housing counseling
The guidance in this ML is effective for case numbers assigned on or after August 15, 2013 through September 30, 2016. Note: This ML will serve as Section G until the 4155.1 Handbook can be updated.
• Purchase loan in all FHA programs with the exception of Home Equity Conversion Mortgages.
• Utilize the provisions of this ML for eligible borrowers when AUS results in a “Refer” or is manually downgraded.
• Borrowers must meet all other applicable FHA eligibility and policy criteria.
Borrowers that may be otherwise 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 if the borrower:
• can document that the delinquencies and/or derogatory credit are the result of an Economic Event as defined in this ML, and
• have completed satisfactory Housing Counseling, as described in this ML, and
• can meet all other HUD requirements
Economic Event – any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months.
Onset of an Economic Event – the month of Loss of Employment/Income.
Recovery from an Economic Event – the re-establishment of Satisfactory Credit for a minimum of twelve (12) months.
Housing Counseling – for purposes of this ML, means counseling from a HUD-approved housing counseling agency related to homeownership and residential mortgage.
A borrower is deemed to have Satisfactory Credit if:
• the borrower’s credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
• any open mortgage is current and shows twelve (12) months satisfactory payment history.
Non-traditional credit history is acceptable per the guidelines of the Mortgagee Letter.
Verification of 20% Reduction in Household Income
Verification of a reduction in Household Income of twenty (20) percent or more for a period of at least six (6) months that resulted from the Loss of Employment, Loss of Income, or a combination of both is required.
Loss of Employment can be verified by obtaining:
_ a written VOE evidencing the termination date or in cases where the prior employer is no longer in business:
– a written termination notice, or
– other publicly available documentation of the business closure, and documentation of receipt of unemployment income.
Previous income prior to the “Loss of Income” must be verified by obtaining:
· a written VOE evidencing prior income; or
· signed tax returns or W-2s evidencing prior income.
Post Economic Event Income
Verification of the Borrower’s Household Income after the onset of the Economic Event in also required.
Economic Event-Related Payments or Credit Deficiencies
To establish that the borrower’s derogatory credit was the result of an Economic Event, it is required to determine that:
• the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
• the borrower’s derogatory credit occurred after the Economic Event Onset, and
• the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months
Note: Foreclosures, deeds-in-lieu, Short Sales and Bankruptcies require that 12 months have elapsed since the date of the derogatory item (i.e., date of sale for a short sale, discharge date for a bankruptcy, etc).
To qualify under the guidelines of the Mortgage Letter, borrowers must:
• receive home-ownership counseling or a combination of home-ownership education and counseling provided that each participant receives, at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies
• The counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of re-occurrence. The housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an on-line course.
Note: Counseling must be completed a minimum of thirty (30) days but no more than six (6) months prior to application. Housing counseling may be conducted in person, via telephone, via internet, or other methods approved by HUD.
A list of agencies can be obtained online at http://www.hud.gov/.