The FHA Back-to-Work Program is a great way to get back into a home after suffering a traumatic economic event. Just like a standard FHA loan, this program offers lucrative terms and flexible guidelines. Prior to 2013, people that suffered the loss of their home or were forced to file for bankruptcy were subjected to very long waiting periods before they could apply for an FHA loan again. In general, this meant waiting 2 years after a bankruptcy and 3 years after a foreclosure. For someone that wishes to purchase a home, this could seem like a lifetime! Thanks to the new program, which started in 2013 and is expected to last through the beginning of the fourth quarter of this year, those waiting periods no longer exist.
How the FHA Back-to-Work Program Works
The FHA Back-to-Work Program enables most people that suffered an economic event but have since turned their life around to get back into homeownership after just 12 months. If you can prove that you have been able to turn your financial life around in that time, meaning no late payments, credit scores that meet the minimum requirements, and debt ratios that are in line with the FHA guidelines, you have a good chance at owning a home much sooner than the 2 and 3-year waiting periods the FHA required previously.
Minimum Income Requirements
The income requirements for the FHA Back-to-Work Program operate the same as any other FHA program. There is not a minimum amount you need to make – it is based off of your current debts and how much money you need to make in order to cover them. In general, the FHA would like debt ratios to be as follows:
- 31 percent on the front-end, which includes your mortgage, taxes, and insurance payment
- 43 percent on the back-end, which includes all monthly debts plus your mortgage
As you can see, every situation will differ when it comes to determining the income that will derive those debt ratios. If your income is not enough to cover your debts and to make your debt ratios within the FHA guidelines, then you will be ineligible for the program.
How to Calculate your Income for the FHA Loan
Calculating your income is fairly straightforward with the FHA loan. You will need to provide documents that show several things:
- You have enough current income to pay your current debts along with the new mortgage you are applying for
- You have higher income than you had when the economy took its down turn and you were forced to lose your home or file for bankruptcy
- Your income is stable
For the FHA Back-to-Work program, you will have to show your income from when you were experiencing financial difficulty as well as now. The lender needs to see your income from both timeframes in order to gauge how much your income has improved and how stable it is so that they can predict how likely you are to default on your mortgage in the future.
The income you use to document your hardships must show at least a 20 percent decrease in the original income you made. For example, if your company closed and you were forced to take on a job with less responsibility and therefore less income, you can show the decrease and the reason. If your company downsized and shifted you to a different position and your income decreased accordingly, this could also suffice as well. Basically, you need to show the lender that you lost at least 20 percent of your income, no matter the reason, as long as it was no fault of your own, for example, getting fired.
The income you use to document your ability to pay the mortgage today should include your most recent W-2 and paystubs. You need to show that your income increased and that it is stable. This can be done with a Verification of Employment where the employer can verify that you not only work at the company and make the income you stated but also that you are going to be gainfully employed for the foreseeable future.
The lender will then figure out your income on a yearly basis, whether you are on salary or are paid hourly. This annual income is then divided equally amongst the 12 months to come up with your gross monthly income. If you work on commission, bonuses, or an hourly basis, this is how lenders generalize your income over the course of the year. This means the qualifying income they use for your loan might look like a lot less than you generally make, but it accounts for those periods throughout the year when your income dips, especially if your income is seasonal.
Typically for FHA loans, you can include any income that will continue for the next three years. This means in addition to your income from your job, you may include:
- Child support
- Social Security
- Raises that are about to start within the next 2 months and can be proven in writing from the employer
Once you have your qualifying income amount, you can determine if you will fall within the parameters set forth by the FHA. If you qualify for a basic FHA loan, the lender can help you determine if you can get away from the waiting period that they require for negative economic events, enabling you to take advantage of the FHA Back-to-Work Program.