The FHA recently issued a mortgagee letter detailing new guidelines for lenders working with borrowers who have had financial setbacks that might not indicate their ability to make monthly mortgage payments or other financial obligations. According to FHA/HUD Mortgagee Letter 2013-26, “FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.”
The letter continues, “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. 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.”
The FHA has issued new rules to lenders for borrowers in these circumstances. The rules are designed to help lenders and borrowers who are otherwise eligible for FHA mortgages work together in spite of what the FHA calls an “Economic Event”. What do the new FHA rules say about these events and how a borrower can qualify for an FHA mortgage in spite of one?
“An Economic Event is 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. The Onset of an Economic Event is the month of Loss of Employment/Income. Recovery from an Economic Event is the re-establishment of Satisfactory Credit (as defined on page 5 of this ML) for a minimum of twelve (12) months.”
How do the new FHA loan rules help the borrower who faced an Economic Event before applying for an FHA mortgage or refinance? According to the mortgagee letter:
“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 indications of derogatory credit are the result of an Economic Event as defined in this ML,
–has completed satisfactory Housing Counseling, as described in this Mortgagee Letter, and
— meets all other HUD requirements.
There are a variety of documentation requirements that must be fulfilled in order to do this, including the lender’s need to document the economic event itself. “The lender must verify and document a reduction in the borrower’s 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.”
For loss of employment an written termination notice may be required; for the loss of income a borrower may need to furnish tax documents that show the loss of income reflected in their tax returns. For more information on these new FHA loan rules, speak to a loan officer or contact the FHA directly.
Do you have questions on FHA loan rules? Ask us in the comments section.