The Federal Housing Administration recently announced that it will soon be easier for borrowers with bankruptcy, foreclosure or a short sale in their past to qualify for an FHA loan. On August 15th, HUD released a mortgagee letter outlining new requirements for applicants who have experienced an “economic event” in their past that they have since recovered from. In this letter, HUD set forth the “Back to Work” program guidelines designed to help mortgage applicants who have had recent financial difficulties that were the result of circumstances beyond their control.
The FHA Back to Work Program
As part of FHA’s Back to Work program, the applicant’s waiting periods have been waived for short sales or foreclosures and the waiting period for getting an FHA mortgage after bankruptcy has been reduced. Previously, a borrower had to wait at least two years for approval of a mortgage after bankruptcy if they had a Chapter 7 Bankruptcy and at least three years after a foreclosure or short sale to be eligible for a new FHA loan. With this new program, these waiting times have been waived other than the applicant must simply show that they have made all their payments on time for the last 12 months.
Getting a mortgage after bankruptcy or foreclosure
To be eligible for the “Back to Work” program, applicants must demonstrate the following things to their lender:
- The applicant must be able to document the bankruptcy, foreclosure or short sale was the result of a 20% or greater loss of household income due to an economic event. Examples of economic events include any occurrence that results in loss of job, loss of income, of both that was beyond the applicant’s control and caused at least 20 percent reduction in the their income for at least 6 months.
- The applicant must demonstrate full recovery from the event through re-established credit for the last 12 months and have made all required payments on time. Payment examples include car payments, home loan payments, credit card payments and bankruptcy payments.
- The applicant must have completed a HUD-approved homeownership counseling course between 30 days and 6 months prior to application. A list of approved housing counselors can be found at www.hud.gov or by calling 1-800-569-4287.
Financial issues affected by the program
If you have experienced the following financial issues in your recent credit history, the new Back to Work program may be able to help you purchase a home:
- Short Sale
- Deed-In-Lieu Transaction
- Forbearance Agreement
- Loan Modification
Getting a mortgage after foreclosure has been tough in the past and, as with all mortgage programs, the Back to Work program is subject to additional lender guidelines and availability. Click here to get mortgage rates and determine your eligibility.
Back to Work Program Questions and Answers
What’s the new waiting period for getting a mortgage after bankruptcy under this program?
The waiting period for getting a mortgage after bankruptcy has been reduced to 12 months if all payments have been made on time. Previously, FHA loan wait times after bankruptcy were 2 years for a Chapter 7 bankruptcy and one year for Chapter 13 bankruptcy.
What is the new waiting period for getting a mortgage after foreclosure under this program?
The waiting period after foreclosure has also been reduced to from 3 years to 12 months, providing the applicant can demonstrate they have recovered from their hardship and made all required payments on time.
How do I document the required 20% loss of income to be eligible for this program?
Your loss of income can be documented in two ways. The first is through a Verification of Employment (VOE) that documents the date and amount of drop in your income level. The second through W-2’s or signed tax returns that show the 20% or greater loss of income.