Not too long ago, homeowners who experienced bad luck and lost their homes due to financial troubles beyond their control had a reasonable method to fast track their re-entry into the real estate market.
Today, a consumer who sells his or her home in a short sale or loses it in a foreclosure would have to wait 36 months to purchase a primary residence again with a Federal Housing Administration (FHA) fixed-rate mortgage. However, the FHA Back to Work Program used to allow a buyer to purchase a primary home just 12 months after a foreclosure, short sale, or a deed in lieu of foreclosure.
The program — announced in 2013 and extended through Sept. 30, 2016 — aimed to fulfill a lofty goal: offering families a second chance at homeownership. The only sticking point required applicants to specifically document the financial problems that caused them to forfeit their prior home in order to qualify.
In recent years, with the effects of the Great Recession waning and the housing market recovering, the underlying need for the program has become less severe, and the end of the FHA Back to Work Program means that less homeowners require special assistance.
However, the program’s conclusion provides a great example of how loan regulations can be adjusted to help families weather extraordinary circumstances. While the FHA Back to Work Program ended, several helpful programs remain in place to help homeowners qualify for second chance home loans.
Read on to learn how the FHA Back to Work Program worked, why it was so effective, and what alternative programs are currently available. Credit.com has offers many resources to help homebuyers evaluate their potential purchases — from free credit reports to mortgage and debt-to-income calculators. With our help, you can feel confident in your financial future.
First Things First: Check Your Credit Before Buying a Home
If you’re thinking about or planning to buy a house, the first thing you should do is check your credit score and pull a report. You’ll want to ensure there are no errors on your report and if there are, you’ll want to dispute them before putting an offer down. These errors are likely impacting your credit score.
For a lender to approve your application and offer you the best mortgage rates, it’s always best to have a high credit score. If you have time to rebuild your score and feel it will increase your chances of getting a better mortgage rate, you can take steps to improve your score.
If you don’t have to time to rebuild your credit score before buying a house, you can consider refinancing your home loan in order to get your loan approved. However, refinancing may not save you as much as you think so be sure to look at the term details before making the decision.
Difference Between FHA and Regular Bank Loan
The Federal Housing Administration was created in 1934 to help consumers qualify for loans during the Great Depression, when foreclosures and defaults were common. An FHA loan is insured by the FHA in order to entice lenders to provide loans to homebuyers with less-than-perfect credit.
A conventional loan, on the other hand, is not guaranteed by any entity other than the borrower and is subject to stricter requirements — and often a larger down payment.
According to Zillow, there are several qualifications borrowers must meet to qualify for an FHA loan, including:
- Having 3.5% for a down payment
- Being gainfully and steadily employed
- Possessing a Social Security card, legal residency, and being of legal age to sign a mortgage which is typically 18 years old but varies depending on the state
- Holding a credit score of 580 or higher
Qualifications for the FHA Back to Work Program
In order to qualify for the FHA Back to Work Program, you needed to show that the loss of your previous home was truly due to circumstances beyond your control. Unfortunately, the program did 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 needed 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 have met the requirement if your pre-event income was $100,000 and dropped to $80,000 or lower for six consecutive months beforehand.
How you supported your claim: The lender with whom you applied would have ordered 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 would also meet the FHA requirement.
Full Recovery With Satisfactory Credit
The FHA wanted you to demonstrate that you were back on both of your feet. You needed to show that since the previous financial calamity, you re-established your income and paid your other obligations as agreed.
How you supported your claim: You needed a credit score of at least 640 or to have gone through a HUD-approved counseling agency related to homeownership and residential mortgage loans.
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 drew 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 was unable to provide a clear, documented 20% loss of income for six consecutive months leading up to the event, it was difficult for them to qualify 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 loss of income is simply not enough; for this program, supporting documentation was needed to corroborate your story.
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 remained 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—six 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.
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. Then, you can look into credit cards for rebuilding your credit. There are also 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:
- Why You Should Check Your Credit Before Buying a Home
- How to Refinance Your Home Loan With Bad Credit
- How to Get a Loan Fully Approved