New FHA Guidelines Soften the Impact of Economic Related Credit Issues

The Federal Housing Agency (FHA) issued new guidelines as a response to the wave of recession driven bankruptcies, late payments, loan modifications and short-sales. The new guidelines allow borrower who can show that they have recovered from an economic hit to qualify for FHA backed loans. Some of the important aspects of the new guidelines are listed here.

FHA allows borrowers who allege that their credit problems were the result of loss of income or employment  to apply for FHA loans as long as they can show that:

• the bad credit such as late payments, bankruptcies and short sales were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
•  the borrower has recovered from the loss of income or employment; and,
• the borrower has taken housing counseling within 6 months of application.

Definitions

An Economic Event

A circumstance that is beyond the borrower’s control and that reduces the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months.

 Onset of an Economic Event

The month of Loss of Employment/Income.

Recovery from an Economic Event

• The re-establishment of Satisfactory Credit (as defined on page 5 of this ML) for a minimum of twelve (12) months.
• 12 months after short-sale
• 12 months after deed-in-lieu
• 12 months after bankruptcy discharge in chapter 7
• 12 months after dicharge of chapter 13 bankruptcy along with verification that all payments were made on time. 

The term borrower includes borrowers and co-borrower.

Satisfactory Credit

• the borrower’s credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
•  any open mortgage is current and shows twelve (12) months satisfactory payment history. Mortgages may have been brought current through loan modification, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s)
• no history of delinquency on rental housing payments; and
• no more than one thirty (30) days delinquency on payments due to other creditors; and
•  no collection accounts/court records reporting (other than medical and/or identity theft).

Borrower Household Income

The gross income of the borrower and all co-borrowers living in the residence at the time of the event as computed in accordance with FHA income requirements.

Household Member

an individual residing at the borrower’s primary residence at the time of the Economic Event and who was a co-borrower on the borrower’s previous mortgage.

Verification of Loss of Income/Employment

1. 20% Reduction of Income for 6 months. 
2. a written documentation evidencing prior income; or
3.  signed tax returns or W-2s showing prior income.
4. a written termination notice,
5.  other publicly available documentation of the business closure,
6.  documentation of receipt of unemployment income
7. two year history of seasonal employment in the same field just prior to the Loss of Income
8. wo year history of continuous part-time employment just prior to the Loss of Income