The U.S. Department of Housing and Urban Development recently published Mortgagee Letter 2013-26 under the subject “Back to Work–Extenuating Circumstances” for all FHA-Approved Mortgages. This new ML explains that FHA is continuing its commitment to “fully” evaluate borrowers who have experienced periods of financial difficulty due to “extenuating circumstances.”
Due to the recent recession, there have been many borrowers who have experienced unemployment or some other type of severe reductions in their income, which has caused the borrowers to be unable to make their monthly mortgage payments, and unfortunately, resulted in a loss of their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure.
In addition, some borrowers were forced to file for bankruptcy to discharge or restructure their debts. And, due to these recent recession-related periods of financial difficulty, the borrower’s credit has been affected negatively.
According to the ML, FHA recognizes the hardships faced by these borrowers and understands that their credit histories may not completely reflect the borrower’s “true” ability or propensity to repay their mortgage. So, FHA is now allowing for the consideration of borrowers who have experienced an “Economic Event.”
An “Economic Event” is defined as any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which directly causes a reduction in the borrower’s Household Income of 20% or more for a period of at least six months.
Many borrowers who are ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as any delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for this FHA-insured mortgage.
However, the borrower must do the following:
- Document that the delinquencies and/or indications of derogatory credit were the result of an “Economic Event” as defined earlier
- Satisfactorily completed Housing Counseling
- Demonstrate full recovery from the “Economic Event”
- Meet all other HUD requirements
The ML also explains that the “onset” of the Economic Event is the month of the borrower’s Loss of Employment or Income and the “recovery’ from the Economic Event is the actual re-establishment of Satisfactory Credit for a minimum of 12 months.
Housing Counseling is a very important aspect that allows borrowers to better understand their loan options and obligations. The counseling assists borrowers in the creation and assessment of their household budget, teaches how to avoid any mortgage scams, and makes the borrower better prepared for future financial shocks, should they encounter them.
If you have had an Economic Event and are interested in what FHA has to offer in its new Mortgagee Letter, please contact me and we can discuss this new program.
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My bankruptcy is now discharged. I am selling my house and want to build a new smaller house.
I own the lot and will have a sizable down payment on the construction cost. I would like a construction loan. What are the my options?
Call me to discuss options as there are several questions to be answered. One is how long ago was the discharge of the BK and what type did you do. Also were you late on any mortgage payments? You will need a construction loan and credit will be a big factor especially for an institution loan.