FHA loans offer great financing terms for first-time homebuyers as well as subsequent homebuyers. The rates are typically low and the guidelines to qualify can be flexible. This is especially true with the FHA Back-to-Work Program, which is an extension of the flexible guidelines on a standard FHA loan. The terms and qualifications on a standard FHA loan remain the same, the only difference is the waiting period and the down payment required borrowers must experience when they have a negative event on their credit history, such as a bankruptcy or foreclosure. This program enables borrowers to wait just 12 months after that event rather than the standard 2 years for a bankruptcy and 3 years for a foreclosure.
How the FHA Back-to-Work Program Works
The FHA Back-to-Work Program has specific guidelines, as any loan has in order to qualify. The standard credit score requirements and debt to ratio limits still apply. For instance, if your credit score is below 500, you are not applicable for this loan. What is flexible, however, is the credit history and how you can show that you have improved your financial responsibility. The FHA recognizes that certain borrowers were forced to file for bankruptcy or lose their home due to no actions of their own. They were either downsized, let go or forced to take a job for lesser pay. In any case, these instances were not due to a borrower’s actions. In the event that these borrowers were able to pick up the pieces, make more income, and make good on their current debts, they are eligible for the forgiveness program with the FHA.
This program enables borrowers to get an FHA loan without the long waiting period. If 12 months have passed since the negative event, and your debts are now current, you can apply for the loan. You will have to prove that you have overcome the event, however, which can be done with several things:
- Showing the reason for your decrease in income, such as a layoff or downsizing along with documentation of the decrease with tax returns or W-2s
- Showing the recent increase in your income that enabled you to pay your bills on time with current tax returns or W-2s
- A clear 12-month credit history with all timely payments
The Down Payment Requirements
As with any FHA loan, there are down payment requirements for these loans. How much you must put down depends strictly on your credit score. Whether or not you have a bankruptcy or foreclosure in your past does not matter – the FHA and the lender strictly use your credit score.
- Credit scores of 500 to 580 require a down payment of at least 10 percent of the purchase price of the home
- Credit scores of 581 or above require a down payment of at least 3.5 percent of the purchase price of the home
The guidelines are plain and simple – there is no working around it. If you have a credit score below 580 and do not have the 10 percent to put down, there are ways you can improve your credit in order to decrease the amount of money necessary for the purchase of a home. In general, if you have late payments in the last 12 months, it will be harder to qualify for the Back-to-Work Program as it is, so it is worth working on those late payments, bringing everything current and hoping that your credit score increases along with the timely payments. In addition, you should try to pay off as much of the debt reporting on your credit report as possible in order to decrease your utilization rate to lower than 30 percent, which is the best rate according to the credit bureaus.
In the end, the FHA Back-to-Work Program gives you the ability to get back into home ownership if you lost your home or to become a first-time homeowner even if you suffered a bankruptcy. What it comes down to is showing that you were able to turn your financial life around and that you can pick up the pieces and improve your credit history even after such an economic disaster. The FHA program gives you a new chance at becoming a homeowner and paving the way for a successful financial future.