After the economic crisis in 2008 many individuals were jobless, some of them were homeowners.
Most of them had never defaulted any payments in the past and had maintained a reasonable credit history.
With jobs gone, savings started vanishing slowly. As a result they defaulted on their mortgages, which in turn resulted in foreclosure or liquidation of homes.
Typically, homeowners are required to show a perfect credit history of 7 years before applying for a mortgage loan.
Federal housing administration (FHA) recognized that many of these defaulters were mere victims of the economic depression. In August 2013, FHA introduced the “Back-to-work” program which shortens the wait to 1 year from the stipulated 2 years /3 years declared earlier. This wait begins after declaration of bankruptcy, foreclosure or short sale.
This program offers these innocent victims of the economic downturn a “second chance” at living in their dream house. Before this program, the waiting period was two years for FHA loans, after bankruptcy and three years after a foreclosure or a short sale.
FHA back to work program was launched as an intermediate solution to the housing and economic downturn that started in 2008. After the economic downturn, many individuals have found jobs and their financial health has improved. They are now ready to buy their dream home.
On August 15, 2013, the Federal Housing Administration (FHA) relaxed it’s norms for borrowers who went through tough times due to‘extenuating circumstances’ (economic distress). This has gained popularity as the “Back to work – extenuating circumstances program”. The unfortunate credit events which are covered hereunder are –
If any of the above events have occurred due to the economic downturn, FHA proposes to give them a second chance.
Many individuals, including the lenders who are part of the back-to-work program were not very convinced with this development. They felt it was a bold move, when the economy hadn’t recovered completely from the economic tragedy.
In September 2013, the FHA announced a requirement for a bailout to the tune of $1.7 billion to support its reserves. This was necessary to offset the recent losses incurred its reverse mortgage program and to address declining volumes.
The success of the back to work program depends on the general sentiment ruling the housing market. Approximately 2.5 million homeowners went through bankruptcy and foreclosure via short sale. It remains unclear how many of them have regained confidence in the market conditions. Are they willing to risk their financials yet again? The answer is still unclear.
Evidently, those who consider buying a home from an emotional standpoint are likely to avail this opportunity to own their dream home. Those who view this from a financial angle may prefer to stay away for the time being. They are likely to watch how the housing market pans out over the next few years.
There are a set of lenders who are FHA approved to participate in this back to work program. An individual can start his loan application with one of these lenders, 30 days after receiving their counseling certificate.
Many websites provide the list of FHA lenders available in various states. One can easily find a suitable lender in their area by accessing this information online.
Extra due diligence has to be conducted to determine the borrowers’ ability to repay the mortgage under the back-to-work program. FHA lenders have in the past issued numerous faulty loans due to their excessive dependency on automated underwriting.
The lenders have to ensure they identify serious borrowers and don’t end up with non-performing assets in their books.
There are a number of changes which have been made in FHA 2016 norms. Some of the important changes not only affect the cost of FHA loans but also the application process and approval procedures.
Amendment of the National Housing Act requires all approved mortgages to assume liability for all the loans that they originate and underwrite.
The recent increase in mutual mortgage insurance states that, the borrower must bear the insurance for the entire term of the mortgage borrowed. Earlier they were required to carry it only until they reached a certain loan-to-value ratio (A ratio used to expresses the ratio of a loan to the value of an asset purchased).
Lenders are coming up with alternate solutions so as to ensure the borrowers can continue to enjoy the conventional loan insurance scheme.
Borrower undertakes a “pre-purchase counseling” with an HUD approved housing counseling agency 30 days before starting the application process.
A certified counselor will assess the following –
Springboard is a HUD-approved housing counseling agency. It acts like a check board where you can check to ensure all the necessary procedures are followed to qualify. Counseling has to be completed at least 30 days before applying for a new FHA mortgage. The certificate received after completion of pre-purchase counseling is valid for up to 6 months.
A lender has to first assess if you qualify for the FHA Back to work program. The basic need for applying herein is to have undergone financial hardship. The prospective borrower has to explain the financial hardship that he underwent.
A typical financial hardship would be loss of job or drastic lowering of income by at least 20% for a minimum period of 6 months. Further, the borrower has to re-establish credit with on-time rental housing payments for a minimum of 12 months with no lapses.
Also, the norms specify that none of the other loan payments should have had a delayed payment of over 30 days. If there are any judgment accounts, then a capacity analysis is conducted to assess if the borrower is capable of repayment of the credit.
Many people are not able to document their loss of job or reduction of income properly. The documentation process also is quite complicated. So, most individuals fail to qualify for this program.
Those who have been able to establish their financial hardship and show a good credit line post restoration of their financial health have benefited from this program.
Interested borrowers with a history of divorce, loan modifications or adjustable rate loan recasting, cannot qualify for this program. Also, they are quite rigid on the 20% loss of income for a period equal to or extending beyond 6 months.
The new FHA which reduces the wait from 36 months to 12 months may not be a permanent program. It was one of the many solutions to pull the economy out of the depression.
For individuals whose life has come back to normalcy and those who wish to buy a house again can apply for FHA’s Back to Work Program until September 30, 2016.
Debt to income ratio tells us how much percent of the net income goes towards EMI (Equated monthly installment payments). 41% to 45% is considered risky for an FHA loan. Lenders conduct a thorough analysis to ensure that the debt is within acceptable limits. Also, in case where the percentage exceeds the prescribed limits, the borrower has to show records of 2 years of consistent employment.
Credit score is arrived at after considering multiple items such as income, debt, repayment lapses, credit card payments etc.
As of 2016, FHA Back to work program insists on 620 or above as qualifying credit score, this would require a nominal down payment of 3.5%. If the borrower has declared bankruptcy or foreclosure in the past, then a perfect credit record has to be maintained. This has to be maintained for a period of 4 – 5years since the financial fallout. This is regardless of the current credit score.
Below is the list of documents required for various economic events –
Documentation & Verification
Collections and judgments
|· Document and verify all collections and judgments were due to economic event
· For open collection accounts and judgments, borrower has to fulfill requirements as per handbook 4155.1, section 4.C.2.e, Analysis of collections and judgments
|· Minimum 12 months must have passed since the date of foreclosure or deed-in-lieu
· An economic event resulted in the foreclosure or deed-in-lieu
|· At least 12 months must have elapsed since date of sale
· An economic event resulted in the short sale
Chapter 7 Bankruptcy
|· Must be at least 12 months since the bankruptcy was discharged
· Bankruptcy was a result of economic event
Chapter 13 Bankruptcy
|· Bankruptcy should have been discharged before applying for the loan.
· All required payments must have been done on time
· At least 12 months of the pay-out period under the bankruptcy must have elapsed and all required bankruptcy payments must have been done on time
· Bankruptcy was a result of economic event
Now that you know how to apply for the FHA back to work program, you can have a second chance at owning your dream home.
Clearly, this program offers a new hope to individuals who have been able to put their lives back together after going through financial distress. It is a second chance at owning their dream home. Although, many of them have failed to qualify or produce the required documentation, it will remain a boon to those who manage to qualify and provide the required documents.
The new regulatory changes are brought in to ensure that the non-performing assets do not increase in the books. The economic downturn has already left the financial institutions with a lot of debt to clear-up in their balance sheets.
On the whole, this program is a welcome change, especially with uncertainty of the industry (including Fannie Mae and Freddie Mac’s future), FHA reaches out to stay strong and liquid.