FHA loans have always been the “go to” loan for first-time homebuyers. In recent years it also became the most popular program for borrowers that suffered credit issues as a result of the housing and economic crisis. What held many people back, however, was the waiting period required if a person suffered a bankruptcy or foreclosure. The standard FHA guidelines required borrowers to wait 3 years after a foreclosure and 2 years after a bankruptcy before they would become eligible for an FHA insured loan. Today, with the FHA Back-to-Work Program, the parameters changed and more people are now eligible for FHA loans.
Standard FHA Requirements
The standard FHA requirements still stand – borrowers cannot have a credit score lower than 500 (580 if they wish to put pay only the minimum down payment); there must be 3.5 percent available to put down on the home either with the borrower’s own funds or a gift; and the borrower’s income must be sufficient enough to create a debt ratio no higher than 31 percent on the front end and 43 percent on the back. In addition, the income must be stable, meaning that you received it for the last few years; your job must be stable, and your debts must be current. Of course, the FHA does have the most flexible guidelines, which means lenders do have some leeway in what they accept as long as there are compensating factors in place. This means that if a borrower has an exceptionally high credit score (over 720), yet a slightly higher debt ratio, the lender may be able to approve it based on the financial responsibility the borrower portrays with the high credit score.
What differs with the FHA Back-to-Work Program is the extenuating circumstances that the FHA now allows. The FHA put forth new rules for certain conditions because of the realization that some things happened beyond the control of many borrowers. Millions of Americans did not choose to lose their homes or to file for bankruptcy – many of them were forced to do so because of the turn they economy took. Many people lost their jobs either due to downsizing or companies completely closing, which left them unable to pay their debts, forcing many people to become homeless. Because of these unfortunate circumstances, the FHA has chosen to look upon a variety of circumstances with a new attitude. These circumstances include:
- Short Sales
- Chapter 7 and 13 bankruptcies
- Loan modifications or forbearance agreements
What is the Back-to-Work Program?
You can look at the Back-to-Work Program as a second chance at building a good financial life. The second chance is given to those that can demonstrate that they were hit by a stroke of bad luck and not deliberate default on their mortgage and other debts. The defaulted payments must be a result of a job loss or at least a serious decrease in your income as a result of downsizing or being required to take on any job that was available to try to make ends meet. There are certain guidelines put in place in order to meet the FHA guidelines.
For example, if you experienced a foreclosure as a result of your company closing, leaving you without a job, yet you can show how you bounced back from the event, have gotten a new job and have paid all of your debts on time since then, you would be a good candidate for the program. The FHA wants to help those that suffered an economic event which was a result of losing at least 20 percent of their income for 6 or more months, yet has since turned their life around. They do not see a reason to continue to punish these people that are trying to make good come out of bad – they are no longer forced to wait the long periods of time to apply for an FHA loan, especially when the FHA loan is probably one of the only programs available to them due to their flexible guidelines.
In order to qualify, you have to agree to undergo housing counseling. This must be completed before you can close on the loan. This is meant to help educate you on the mortgage, what you are getting yourself into, what the costs of the mortgage are, and how long you will be responsible for paying this debt.
Providing the Right Documents
There are several things you will need to document in addition to the standard documents necessary to apply for a loan. You will need to show proof of the decrease in your income totaling at least 20 percent; the improvement in your credit since the economic event; and proof of when you filed for bankruptcy or lost your home in a foreclosure.
The loss of income can be proven with your income documentation, whether W-2s or tax returns. You can show the lower income for the period of time you were unemployed or underemployed and then how the income increased after a period of time. You can also show the improvement in your credit score simply by providing your credit report. The lender will look at several time periods on your credit report:
- The time leading up to the economic event
- The time immediately following the event
- The previous 12 months in which you should have shown an improvement and not had any late payments
The only exception to the late payment rule would be if you had minor delinquencies on revolving debt, but for the most part, all debts must be paid on time.
In general, applying for the FHA Back-to-Work Program is similar to the method you would use to apply for an FHA loan with the exception that you have to provide proof of your economic event and how you overcame it. The best news is that you only have to wait 12 months after almost any economic event as long as you have the proof to show that it was outside of your control. In the end, you can qualify for an FHA loan faster than any other loan type that is available today.