The FHA has issued a new mortgagee letter which revises its policies related to credit evaluation for FHA loan approval. FHA Mortgagee Letter 2013-26 says the FHA is committed to helping borrowers who need FHA mortgage loans who may have financial difficulty due to reduced or terminated employment, bankruptcy, and other financial difficulties.
“FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances. 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 pre- foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts.”
Mortgagee Letter 2013-26 continues with some hopeful words for those who may fall into the above categories. “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.”
What does this mean for a potential FHA borrower who has financial issues similar to those mentioned above? Mortgagee Letter 2013-26 says:
“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.”
This has very important implcations for any borrower who “may be otherwise ineligible for an FHA-insured mortgage” because of the FHA’s policies on “seasoning” or waiting periods in the wake of 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” in the words of the FHA.
We will explore the specifics of this new set of FHA policies in future blog posts, but if you are currently thinking of applying for an FHA loan and have circumstances which may be included in the guidance listed here, speak to your loan officer about how these new FHA policies may affect you. You can also contact the FHA directly by calling 1-800 CALL FHA.