The housing crisis and the recession crushed a lot of Americans who lost their jobs and their homes in an economic tsunami that spread throughout the world. Now the FHA is offering a chance for some of those consumers to qualify for a new home loan. New FHA guidelines announced August 15, 2013, in Mortgagee Letter 2013-26 say that borrowers who meet certain criteria and qualify for a loan under FHA requirements will be able to apply for an FHA loan without the usual mandatory waiting period after a foreclosure, short sale or bankruptcy.

The new program, known as “Back to Work – Extenuating Circumstances” applies to FHA loans issued between August 15, 2013, and September 30, 2016, and is available for purchase loans and refinancing.

Standard FHA loan guidelines for credit scores and debt-to-income ratio and full documentation of income, job history and assets must be met.

FHA requirements

In addition to meeting general FHA requirements, borrowers must provide documentation that they experienced what the FHA calls an “economic event.” The event, which must be either unemployment, the loss of income or both, must have caused a reduction in the borrowers” income of 20 percent or more for at least six months or more. Besides providing proof of the economic event, borrowers must prove that they had good credit before the job loss or loss of income and that any subsequent bad credit was a result of the economic event.

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Borrowers must also prove they have fully recovered financially from the event. Their credit history must be clear of any late payments for at least 12 months on installment debt and mortgage or rent payments and clear of any major derogatory issues on revolving credit accounts. No collections or judgments can be part of the credit report unless they involve medical bills or identity theft.

The FHA also requires borrowers to participate in an FHA-approved housing counseling program before a new FHA loan can be approved.

FHA lenders must verify that at least one year has passed since the foreclosure, short sale or bankruptcy and that the economic event was directly responsible for the bankruptcy or foreclosure rather than any irresponsible behavior by the borrowers.

FHA loans carry higher mortgage insurance premium costs than conventional loans, but they are often the only option for borrowers who have experienced credit issues or financial challenges in the recent past.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT”s REIT magazine and numerous Realtor associations.

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