FAQ – FHA ‘Back to Work; Extenuating Circumstances’ Explained

Normally HUD Mortgage Letters are pretty boring stuff but the FHA recently made headlines when they issued the HUD Mortgagee letter 13-26 dated 08/15/2013 with the subject ‘Back to Work – Extenuating Circumstances’.

This 15 page letter outlines how the FHA plans to make exceptions that will allow borrowers with troubled past related to the economic malaise commonly called the Great Recession, to reenter the market in a shorter time-frame.It was seemingly only a matter of hours before the news outlets had rounded up their list of usual talking heads who began bloviating on how this rule change could be a boon for homebuyers who meet the criteria of this new FHA policy change. Videos have cropped up all over the web extolling the virtue of this change, but in the end, the window is very narrow and most people will not qualify so here are the highlights explained in plain English:

Borrowers who experienced an ‘economic event’ related to job loss or reduced household income during the recent financial crisis.

An Economic Event is 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 twenty (20) percent or more for a period of at least six (6) months.  Divorce is NOT an ‘economic event’!

Because of these recent Recession-related periods of financial difficulty, borrowers’ credit may have been negatively affected.

Housing counseling is an important resource for both first-time home buyers and repeat homeowners

Housing counseling enables borrowers to better understand their loan options and obligations, assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower.

Borrowers, who may be otherwise ineligible for an FHA mortgage due to waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage if the borrower can:

  • document that the delinquencies and/or indications of derogatory credit are the result of an Economic Event as defined in this ML
  • completed satisfactory Housing Counseling, as described in this ML and otherwise meets all other HUD requirements.

Ricardo Cobos is a licensed mortgage loan officer in Raleigh-Cary-Durham North Carolina who has been helping families to achieve financial security through responsible home-ownership since 1998. (919) 526-0183