RTC Mortgage Blog

Underwriting Guidelines Eased for FHA Loans!

The FHA has made it drastically easier for once-struggling homeowners to qualify for an FHA loan.

The Federal Housing Administration (FHA) has announced that it will reduce the time homebuyers must wait after a bankruptcy, foreclosure or short sale before qualifying for an FHA-backed mortgage. The period had previously been a minimum of two years following a bankruptcy, and three years following a foreclosure or short sale. The Federal agency has now reduced the waiting period to one year. This program is for homebuyers only – not refinances.

"FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage," FHA Commissioner Carol Galante said in the letter to mortgage lenders.

The "Back to Work" program, as it's called, doesn't constitute a free pass for those who would otherwise be unable to qualify for financing. But it does re-open the housing market to a great many borrowers who would otherwise have to wait 3 to 7 years. Borrowers will have to show that they experienced an "economic event" whereby their household income fell by 20% or more for a period of at least six months. They must also demonstrate that they have fully recovered from the event, and agree to complete housing counseling prior to closing.

The program will require prospective borrowers to thoroughly document the nature of the "Economic Event," that it resulted in derogatory credit, and that there has been a satisfactory recovery from the Event per the new guidelines. 

Lenders will consider the Economic Event to have caused the derogatory credit if:

·         The prospective borrowers had satisfactory credit prior to the event onset

·         The prospective borrowers' derogatory credit occurred after the onset of the event

·         The prospective borrowers have reestablished satisfactory credit for at least 12 months since the end of the event

Lenders will consider borrowers to have reestablished satisfactory credit if:

·         The borrower has no late housing or installment debt payments for the past 12 months

·         Open mortgage accounts are current and have been paid on time for the past 12 months

·         Borrowers have adhered to the agreement of any open modification plan for the past 12 months

·         Complete a course of Housing Counseling in person, via telephone, via internet, or other methods approved by HUD (who provides a list of Counseling agencies). 

For the purposes of this program, 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 causes a reduction in the borrower’s household income of twenty (20) percent or more for a period of at least six (6) months.  The “Onset” of an Economic Event is the month of loss of employment/income."  Lenders will verify the reduction in income or loss of employment with at least one of the following:

·         A written termination notice

·         Other publicly available documentation of the business closure

·         Documentation of the receipt of Unemployment Income

Additionally, lenders have to verify a 20 percent loss of income due to the Economic Event by documenting borrowers' income prior to the event.  This requirement can be satisfied either with a written "Verification of Employment" form with income details provided by the employer or signed tax returns or W-2s.

What Is An FHA Loan?

The FHA program has been in existence since the 1930’s. Basically, it is a mortgage loan “insured” by the Federal Government against default by the Borrower. FHA loans are available up to $729,750 with as little as a 3.5% down payment or equity. Most borrowers opt for the standard 30-year fixed rate program but 15-year fixed rate and 5-year fixed Adjustable Rate Mortgage programs are also available.  The borrower is obligated to pay the FHA Mortgage Insurance Premium (MIP). The MIP comes in two parts – an “upfront” premium of 1.75% of the loan amount that is financed by increasing the loan amount, plus an “annual” MIP which is included in the borrower’s monthly payment. The amount of the annual premium is calculated according to the loan amount and loan term. For a 30-year fixed rate loan, the annual MIP ranges from 1.30% to 1.55%. The MIP is paid for the life of the loan and can only be eliminated by selling or refinancing the home.

Benefits of an FHA Loan:

·         Low Down Payment / Minimal Equity

·         Down Payment can be gifted

·         Lower Credit Scores are acceptable compared to “conventional” programs

The effective date of the program is August 15, 2013 through September 30, 2016.

Critics of the FHA program say allowing borrowers to buy with little or no down payment and poor credit is essentially no different than a “Subprime” loan which the Government prohibits other lenders from making.   

How do you feel about it? I welcome your opinions.