FHA Makes “Economic Event” an “Extenuating Circumstance”
By: Tracey Rumsey, Staff Underwriter & Karen Deis, Publisher, www.MortgageCurrentcy.com
Well, it took 6 years – but FHA has decided that a job loss or decrease in income can now be considered an “extenuating circumstance,” which means additional business for you.
It’s great news for borrowers – but don’t jump the gun – at least not just yet!
This new FHA Mortgagee Letter (13-26) released on August 15, 2013 and effective immediately now makes “Economic Event” (i.e., job loss, reduction in income, etc.) an acceptable extenuating circumstance.
And no, it was not previously allowed.
The good news: This new guidance allows for a borrower to obtain a new FHA mortgage 12 months after a foreclosure, short sale or other derogatory event with re-established credit and housing counseling.
But, here are some of the issues you may run into:
1. You don’t know if investors will accept this new guidance.
2. The borrower must document the decrease in income.
a. Decrease in income is defined as at least 20% loss of income that lasted for a period of 6 months or more.
b. Loss of job is defined as the “month” the borrower lost their job.
c. Recovery is defined as re-establishing credit for at least a 12-month time period.
d. Decrease in “household” income means “all individuals” residing in the primary residence at the time of the job loss. (So, even if a spouse is not on the loan but lost their job, they still qualify for an extenuating circumstances waiver.)
e. If job loss, written VOE showing date of termination.
1. If company is no longer in business, will need a written termination notice or public document showing the business was closed or start date of unemployment income.
2. If loss of income, VOE showing decrease from year to year, or signed tax returns or W-2 forms showing prior income, and compare to decrease in income of at least 20%.
3. If “seasonal income,” must have had a two-year history of receiving seasonal income and verification of loss of income (20%) or loss of job.
3. The borrowers must have satisfactory credit.
a. No late payments over the last 12 months, including housing, revolving, installment debts.
b. If they still have an existing mortgage, it’s okay if the mortgage was brought current with a loan modification, but still must have been paid on time for 12 months.
c. Non-traditional credit is okay, as long as the borrower has an on-time pay history over the last 12 months.
d. No collection accounts other than medical or identity theft issue.
e. Borrowers must have had satisfactory credit PRIOR to job loss or income decrease.
d. If judgments appear on credit report (and have been paid), they must also be a direct result of the job loss or income decrease.
f. If foreclosure, short sale or deed-in-lieu, must show proof that it was a direct result of income decrease or job loss.
g. If bankruptcy, must be at least 12 months from the date of discharge. Must be related to the economic event.
3. The housing counseling MUST happen a minimum of 30 days PRIOR TO LOAN APPLICATION. Depending on your institution’s definition of ‘application’, this could be difficult.
- A list of non-profit housing counseling services can be found at www.hud.gov or call 800-569-4287.
- Can be conducted by telephone, internet or in person.
- Counseling service must provide “specific” documentation and completion certificate signed by both the counseling service and the borrower
- Housing counseling fees paid by borrower or other agency that subsidizes housing counseling fees
- 4. If the foreclosure or short sale was on an FHA loan and there is a CAIVRS claim, a “Back to Work” waiver is available, but can’t be requested until full underwriting is complete. (Interpretation: More delays.)
- . Reverse Mortgages are not covered by this rule.
- Check with your lenders and see how they are planning to handle this new “extenuating circumstance” and what documents they may require. HUD is very, very specific as to the documents that are required to meet the economic event underwriting rules.
- Get the word out to clients who are in the “derogatory waiting period” zone.
- Let your real estate agents know about the new change.
By the way, there are two other new Mortgagee Letters released regarding final guidance on collections and judgments. But complete details can be found in in the September 10th issue of www.MortgageCurrentcy.com