HUD recently announced that people who lost their home through a foreclosure, short sale or bankruptcy, may be eligible to finance a home again in as little as 12 months. This is a reduction from the previously required minimum of 36 months from the date of the “most recent event.”Released August 15, HUD provided guidelines under “Back to Work – Extenuating Circumstances” meant to ease the path for home ownership for many.
Boomerang homebuyers, as they are now known, will need to document that the reason they were unable to make their payments was due to a specific Economic Event. This impact of this event must have resulted in a decline in income of 20% or more for at least six months.
Some boomerang homebuyers who experienced a bankruptcy and simultaneous foreclosure have discovered that the two events may not be recorded at the same time. In cases where the property did not transfer back to the lender at the time of the bankruptcy, the period for the 36 month minimum waiting period as was required by HUD, did not start until the title transferred back to the lender. In some states, the time for transfer could be months or even years after the discharge of the bankruptcy.
Extenuating Circumstances
Extenuating circumstances for the purpose of these guidelines are as follows. The borrower(s) must have experienced a decline in income of 20% or more for a period of at least six months. This could have been due to a job loss or a loss of income tied to earnings like commissions or other customary bonus or incentive income.
Demonstrated Cure
With any situation of extenuating circumstances, a boomerang homebuyer must be able to document that the event was isolated in nature and not likely to reoccur again in the future. The borrower must also be able to document that they have regained economic stability through timely payments for a minimum of 12 months.
The timely payment history will include rental/mortgage payments, installment payments, and/or revolving payments for the 12 months preceding the mortgage application. There also should not be any new collection accounts.
In addition to re-establishing acceptable credit, the borrower(s) will be required to complete Housing Counseling.
Eligibility Requirements for Documenting Loss of Income
In the event of a loss in employment, the lender will need to document the event by a written Verification of Employment evidencing the termination date, public information documenting the closure of the business if applicable and/or documentation of unemployment income.
The lender will also need to substantiate the loss of income through the verification of tax returns, W-2s and tax transcripts.
Important Definitions
HUD announced several key terms that must be reviewed in accordance with this program.
Economic Event: an occurrence beyond the borrowers control that resulted in a Loss of Employment, Loss of Income or a combination of both which resulted in a loss of Household Income of 20% or more for a period of six or more months.
Onset of Economic Event: the month of the start of or loss of income
Recovery from an Economic Event: the re-establishment of acceptable or satisfactory credit. Satisfactory Credit equates to no derogatory credit for any mortgaged or leased property in the 12 months preceding the mortgage application. This also includes any installment or revolving debt for the same period.
Borrower: “Borrower” includes all parties including primary and/or co-borrower as listed on the loan application.
Borrower Household Income: the income of all parties on the application or Household Members as listed from the previous Economic Event and derogatory credit.
Housing Counseling: Counseling from a HUD-approved housing counseling agency related to home ownership and meets acceptable requirements.
Other Requirements and Information
HUD establishes a base line for lenders to underwrite and approve mortgage applications. Some lenders may choose to require baseline standards that exceed the minimum guidelines listed here with regards to time from short sale, foreclosure or bankruptcy.
Lenders may also choose to enact additional overlays with requirements to evaluation acceptable credit regarding payment history, collection accounts and/or judgments.
In the event a prior defaulted mortgage was endorsed by FHA, the lender will need to request a waiver which may require additional time for processing. For anyone this pertains to, they would be wise to alert the new lender to this as soon as possible in the loan process.
Boomerang homebuyers whose prior hardship was economically driven should be excited by this announcement from HUD. For many, it is now recognized the worst is behind them and the time to buy a new home is here.
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