Many people have been hurt by the economy over the past few years. Most have had their credit damaged and many have had to declare bankruptcy, do a short sale of their home, a foreclosure, pre-foreclosure sale, or a deed in lieu of foreclosure.
The FHA realizes that, sometimes, events affecting credit may be beyond your control, and that credit histories don't always reflect a person's true ability or willingness to pay on a mortgage. If you are one of these people who used to have good credit but perhaps lost a job and/or had health issues which resulted in loss of a home or damaged credit, but have been back on your feet for at least 12 months, the Federal Housing Administration (FHA) "Back To Work" program may allow you to purchase a new home, as early as 12 months after the derogatory event(s).
On August 15, 2013, the Federal Housing Administration moved to relax its guidelines for borrowers who "experienced periods of financial difficulty due to extenuating circumstances". Termed the "Back To Work - Extenuating Circumstances Program", the FHA has removed the familiar waiting periods that typically followed a derogatory credit event. Effective for FHA Case Numbers assigned on or after August 15, 2013, borrowers who have recently experienced any of the following financial difficulties as a result of any qualifying extenuating circumstance may be approved for an FHA-insured mortgage:
- Pre-foreclosure sale
- Short sale
- Deed-in-lieu (a deed instrument in which the borrower conveys all interest in a real property to the lender to satisfy a loan that is in default to avoid foreclosure)
- Collection and Judgment
- Chapter 7 Bankruptcy
- Chapter 13 Bankruptcy
- Loan Modification
- Forbearance Agreement (where the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule over an agreed time period)
The program follows standard FHA mortgage guidelines. You still have to at least meet the minimum requirements for credit scores, debt-to-income ratios, and other qualifications for regular FHA loans. Most lenders require a credit score above 640, and credit scores below 500 are not allowed. The FHA doesn't change mortgage rates based on credit score. Also, there is no premium on interest rate, nor are there additional fees to pay at closing under the FHA "Back To Work" program.
In order to be eligible for the program you must be able to document that there was a loss of a job or some other "economic event" that occurred to cause a significant reduction in income due to circumstances outside your control. You must prove that your household income declined by 20% or more for a period of at least 6 months, which coincided with the above "economic event". In addition, you must be able to document that you have recovered from that event and are financially ready to purchase a home. The program can be used by both first-time and repeat home buyers, as well as for FHA 203k construction loans.
In other words, if you ended up having to short sale your home, had your home foreclosed on or even filed bankruptcy and 12 months have now passed and you have a new steady source of income and are making all other payments on time right now, then you may eligible to purchase a new home, using an FHA-insured mortgage.
In addition, there will be a counseling requirement for all new potential homeowners who would like to use this program, adding another layer of support to ensure that someone is truly ready to purchase after a past derogatory financial event. The counseling session, which typically lasts about one hour, can be taken in-person, over the telephone, or via the internet.
While accurate at the time of this writing, it is advised that the borrower, if considering purchasing or refinancing a home, verify that the information provided herein is still correct by contacting a licensed mortgage professional, in order to discuss this or any other program and to get fully pre-qualified. The FHA "Back To Work" program ends September 30, 2016.