During the housing crisis, many homeowners lost their homes as economic conditions deteriorated. In fact, while it is not widespread today, there are still some who are faced with this problem. Although many of these former homeowners are now renters who have come through the crisis, some would like to purchase a home again which is nearly impossible because their credit is now impaired. FHA, the Federal Housing Administration , has recognized this issue and the need to do something about it.
On August 15th, FHA released Mortgagee Letter 2013-16, the Back to Work Extenuating Circumstances guide. With this update, FHA is offering consumers a way to attain homeownership in as little as 12 months after a bankruptcy, foreclosure, deed-in-lieu or short sale. Under normal circumstances, consumers must wait 24 to 36 months after one of these events happens. Homeowners who went through what FHA calls an Economic Event during the Great Recession can now purchase a home with an FHA mortgage as long as the event can be documented and was due to a loss of income because of a job loss or other occurrence that ultimately resulted in a drop in household income of at least 20%.
According to the guidelines, the impaired credit must be the result of losing employment or household income which was beyond the control of the borrower. The credit issues must have been the result of the economic event, not due to a disregard for financial obligations or the inability to manage debt. Income reduction must have been at least 20% for a period of 6 months or more. A minimum of 12 months must have passed since the borrower’s foreclosure, bankruptcy, deed-in-lieu or short sale.
Since future mortgage payments are important to FHA, the borrower must show that they have a re-established credit for at least 12 months and that it has a satisfactory record. The borrower must be able to show that there has been a full recovery from the event that created the credit issue and loss of home residence. In addition, housing counseling must be completed.
This is great news for former homeowners who are now in a position to purchase a home and have the desire to do so. Many people lost their homes due to the massive layoffs that occurred when the economic crisis occurred. By taking this step and opening the door for these consumers, FHA has seen a need, has taken action and is continuing in its position to promote affordable homeownership.