Mortgages

The FHA Back to Work Program: A Second Chance for Homeowners

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A consumer who sold his or her home in a short sale or lost it in a foreclosure would normally have to wait 36 months to purchase a primary residence again with an FHA fixed-rate mortgage. However, the FHA Back to Work Program allows a buyer to purchase a primary home just 12 months after a foreclosure, short sale or a deed in lieu of foreclosure.

The program — which was announced in 2013, and extended through Sept. 30, 2016 — aims to fulfill a lofty goal: offering families a second chance at homeownership. The sticking point, however, is that you’ll need to specifically document the financial problems that caused you to forfeit your prior home in order to qualify.

How You Can Qualify

In order to qualify for the FHA Back to Work Program, you need to show that the loss of your previous home was truly due to circumstances beyond your control. Unfortunately, the program does not consider previous loan modifications, adjustable-rate loan recasting, inability to rent a previous income property, or even divorce to be sufficient enough reasons to qualify.

Loss of Income

You need to show a 20% loss of income or more for at least six consecutive months leading up to the event to qualify. For example, if the previous foreclosure, short sale or deed in lieu happened due to loss of income, you would meet this requirement if your pre-event income was $100,000, and dropped to $80,000 or lower for six consecutive months beforehand.

How to support your claim: The lender with whom you’re applying will order a verification of employment. The verification of employment would support the dates of when the loss of income occurred. Other supporting documentation would include lower year-to-date earnings with pay stubs within the dates your income dropped. W-2s and/or tax returns that show lower reported wages for that time frame will also meet the FHA requirement.

Full Recovery With Satisfactory Credit

The FHA wants you to demonstrate that you’re back on both feet. You’ll need to show that since the previous financial calamity, you have re-established your income and have paid your other obligations as agreed.

How to support your claim: You’ll need a credit score of at least 640 or have gone through a HUD-approved counseling agency related to homeownership and residential mortgage loans. (You can check your credit scores for free on Credit.com.)

Tip: A 12-month favorable credit history on your other debt obligations would support the credit score requirement.

Missing the FHA Second-Chance Boat

These FHA requirements draw a clear line in the sand by asking for specific related documentation that led to the loss of the home. If a buyer who had a foreclosure, short sale or deed in lieu of foreclosure is unable to provide a clear, documented 20% loss of income for six consecutive months leading up to the event, it will be difficult for them to get qualified for this program.  Here’s why:

The nature of lending in today’s credit environment involves revealing all aspects of the borrower’s credit, debt, income and assets. A simple letter of explanation detailing the events that led to the event is simply not enough; for this program, supporting documentation needs to corroborate the story.

Post-Foreclosure Timelines

If the short sale, foreclosure or deed in lieu of foreclosure took place within the last 12 to 36 months…

Then a documentable loss of income of 20% or more for six months remains in effect.

If the short sale, foreclosure or deed in lieu of foreclosure took place 36 months ago or longer…

Then the previous loss of income documentation threshold does not apply, and a borrower would be eligible for a new FHA loan, as long as the credit, debt, income and assets are acceptable with the lender. A previous house loss does not automatically preclude your ability to qualify.

If the short sale, foreclosure or deed in lieu of foreclosure took place 36 months ago or longer…

Then the lending requirements for other types of loans are as follows:

  • Conventional loan – You’re eligible with 20% down (to avoid private mortgage insurance) seven years after the event, or three years after with documentable extenuating circumstances and a lender exception;
  • VA loan – 36 months out from the date of the event;
  • USDA loan — 36 months out from the date of the event;
  • Jumbo mortgage (this is for loan amounts that exceed the maximum loan limit for a conventional loan in your area) — most lenders require seven years from a foreclosure or a deed in lieu, for a short sale they want 30% down and 36 months out or longer.

Finally, your credit scores will most definitely have taken a hit after you lose your home. However, you can still get to work on rebuilding your credit, and establishing a good payment history on your other debts.  You can start by checking your free annual credit reports and your credit scores.  There are many programs that allow you to monitor your credit scores for free, including Credit.com, which also gives you an analysis of your credit, and can help you create a plan to get your credit back on track.

More on Mortgages and Homebuying:

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  • David Horgan

    There is a company, 1st Alliance Lending, out of Hartford, Ct that is offering this program. Has anyone had any experience with a Back to Work loan?

  • Randy staley

    There trying to say that an Ira distribution while I was layed off is being considered income and therefore put me over the 20% mark. The check was 25000.00 it was savings not income, this is crazy

  • Tony

    Just found out that the Back to work program isn’t really very helpful. Out foreclosure action started in 2007.. It took the bank 6 years to actually close the case. We were not fighting it.. totally their delays. THe foreclosure is already off our credit report yet we went thru 3 months of loan processing all to find out that we aren’t eligible under traditional FHA loan guideline (not quite 3 years since case closed) and not eligible under back to work since in 2012, when the case was closed, we are back to before the loss income. The lender stated that in the year of the actual transfer of the deed from your name to the bank, you must show the economic loss. I do not see how this program helps anyone since the average foreclosure took years.

    • ScottSheldonLoans

      The program allows you to purchase a home just one year after a short sale or foreclosure as long as you can specifically document on paper to the naked eye a loss of income which led to the foreclosure. If the foreclosure took place in 2007, but was not actually sold in the trustee’s sale until 2012-it is 36 months from the date of the trustee sale date depending on when that was you might be eligible now in March 2015. What you should do- is ask the lender to pull copy of the trustee sale date deed- than simply 36 months out from there, and that date will be the soonest you would be FHA eligible, so you don’t have to do the additional hoop jumping the FHA back to work program does require.

  • joe

    I would first check the guideline requirements for FHA approved lenders. I think there is a cap on the fees and things they can charge.

    • ScottSheldonLoans

      This program does usually contains slightly higher rates and fees, but is completely FHA compliant in terms of high costs.

  • Michael Ensminger (mike)

    What if you filed bankruptcy but didn’t include your house and sold the house after the discharge and still have VA eligibility?

    • http://www.Credit.com/ Gerri Detweiler
    • ScottSheldonLoans

      Mike, great question! It’s two years from the chapter 7 bankruptcy discharge date to be eligible. If you filed, but did not actually go through with the bankruptcy you would need to provide supporting documentation to your lender validating that the bankruptcy was never actually discharged and then it would be a case by case basis 2 years or under.

      • Michael Ensminger (mike)

        The bankrupcy was discharged on my bills but not the house. Due to not filing the house I was hoping that would be differant on getting a loan for a new house.
        The house was paid in full (sold) after the backrupcy was discharged.

  • Loveable MsBeauti

    Okay I filed chapter 7 it was final dec 2014 I want to buy a house so are ypu saying I can’t after two years. ? Even if I’m married qill my husband be able to get it

    • ScottSheldonLoans

      If the bk was separate (meaning only he filed and discharged) and you are working with a conventional loan, then yes the bk should not be an issue.

  • Renee

    My bankruptcy was discharged March 2012 and included my home. I did this due to over 12 months at a 68% reduction in income (I have all the documentation). The bank bought the home at foreclosure in February 2015. My credit score is recovering from below 500 to 680 and my income has rebounded significantly. I would like to purchase a home sometime next year (2016), but cannot determine when my “seasoning” starts with the bankruptcy/foreclosure. Am I on track for the FHA Back to Work Program and how much longer do I have to wait? Does the FHA Back to Program end next year? I have $75k+ for a down payment ($100k by next year) but wondered how long I have to wait. Sure hope I’m on target!

    • http://www.Credit.com/ Gerri Detweiler

      Renee – Scott Sheldon is out this week and unavailable to answer your question. In the meantime, have you checked with a lender to see what options they suggest?

  • Michele

    We are in the same boat as a lot of people from our experience over the past several years. We had our own business and rather than continue to pay for warehouse space we built a detached garage at our home. We financed it through a refinance on our home (BIG MISTAKE….hind sight is 20/20). When the economy took a dive, so did our business. I went to work part time while my husband continued to try to keep the business afloat and look for other employment. Long story short, business went under and so did we. BOA wouldn’t even discuss modification until my husband had income. It took him 18 months to find employment making 1/3 less and had to travel an hour.our discharge of bankruptcy was May 2010, but the foreclosure wasn’t filed by BOA and then they sold our loan to Nationstar. We finally did a Deed in Lieu of Foreclosure that was finalized in Feb 2015. After renting for 3 years, We bought a home in Feb 2013 (at a very High interest Only rate) through a Private Mortgage company but it is a Bridge loan that is expiring in Feb 2016. Because we already purchased in this way, would we qualify for REFINANCE or does it have to be purchase?

    • http://www.Credit.com/ Gerri Detweiler

      Michele – Scott is on vacation this week and unable to respond to your question. However there is some good information about the program here — http://backtoworkprogram.org/ — and it sounds like you can talk with a housing counselor to find out if you may qualify. Hope that helps!

    • ScottSheldonLoans

      You could more than likely refinance in February 2016. The guidelines for this program are pretty rigid and specific in a sense that you must have a documentable loss of income supported with tax returns and/or pay stubs or W-2s. The reason why I’m suggesting February 2016 that would earmark three years from the trustee sale date. I would recommend contacting County records in your area and get a copy of the trustee sale date deed. Three years from the date identified on that document is when you would be eligible for FHA financing.

  • Vicki

    Coming off Chapter 7, and always current on mortgage and equity, and vehicle loan that I reaffirmed. Would like to sell my home to live near family. Do I have to wait 2years before I can move even though I’ve paid my bills? Understand that I have to have a minimum credit score of 640. I filed due to my loss of income after my husband passed.

    • http://www.Credit.com/ Gerri Detweiler

      Are you asking whether you can buy another home though you recently filed for bankruptcy? If so this article may help: How Soon Can I Buy a House After Bankruptcy or Foreclosure?

    • ScottSheldonLoans

      On this specific program if you can materially document and show on paper a specific loss of income for six months or longer that directly resulted in the bankruptcy then you would be eligible on a case-by-case basis.

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