Ask the Expert: Rick Cirelli


Underwriting Guidelines Eased

By Rick Cirelli

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The Federal Housing Administration has made it drastically easier for once-struggling homeowners to qualify for an FHA loan. This week, the FHA 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 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 up to seven 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 prospective borrowers had satisfactory credit previously, have reestablished satisfactory credit for a year since the event and are current on their bills. Lenders also want buyers to complete housing counseling.
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 20 percent or more for a period of at least six months.  Lenders will want to verify the reduction in income or loss of employment as well as the borrowers’ income prior to the event with documentation.