FHA Back to Work Extenuating Circumstances Explained
Victims of the recent recession may be eligible to buy a home in as little as 12 months after a bankruptcy, foreclosure, short sale or deed in lieu of foreclosure.
FHA has taken a big step toward acknowledging that the economy forced many responsible California homeowners into default or bankruptcy.
It’s Not Your Fault
An extenuating circumstance is an event that happens completely outside of your control.
Prior to August 2013, extenuating circumstances were limited to the death or permanent disability of a primary wage earner resulting in a loss of income, which eventually leads to a hardship such as bankruptcy, or loss of home.
The Back to Work extenuating circumstance expands this definition to include loss of income due to economic hardship due to a loss of income resulting from lay off, termination, or employer going out of business.
Qualifying for Back to Work Exception
You may be eligible to qualify for the back to work exception if:
- You experienced a 20% loss of household income for a minimum 6 month period
- Your loss of income created an economic event such as bankruptcy, foreclosure, short sale
- You can show a (timing) correlation between the loss of income and the hardship
- You can show that you have recovered from your hardship with 12 months of timely payments
In order to qualify for the back to work exception, you have to show that the financial hardship is in the past and not likely to occur again.
Satisfactory Credit encompasses specific requirements that must be documented prior to this exception being granted:
- You credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
- Any open mortgage is current and shows twelve (12) months satisfactory payment history. Mortgages that have been brought current through loan modifications, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s); and
- You meet all other HUD requirements for qualifying for an FHA insured mortgage.
FHA Back To Work with Extenuating Circumstances
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Satisfactory Credit – Required Documentation
Your lender must verify and document a minimum 20% reduction in your household income for a period of at least six months that resulted from a loss of employment, loss of income, or a combination of both.
To verify and document a Loss of Employment:
Lender receives a written Verification of Employment (VOE) showing the termination date, or in cases where the prior employer is no longer in business:
- a witten termination notice, or
- other publicly available documentation of the business closure, and
- documentation of receipt of unemployment income.
To verify and document a Loss of Income: Your lender will need to verify and document your Household Income prior to Loss of Income by obtaining:
- a written VEO evidencing prior income; or
- signed tax returns or W-2s evidencing prior income
For a Loss of Income based on seasonal employment, your lender will need to verify and document a two year history of seasonal employment in the same field just prior to the Loss of Income, in addition to meeting the documentation requirement above. For a Loss of Income from losing a part-time job, the lender will need to verify and document a two year history of continuous part-time employment just prior to the Loss of Income in addition to meeting the documentation requirement above.
Housing Counseling Requirement
A requirement of establishing Satisfactory Credit following an Economic Event, boomerang buyers looking to use the Back to Work Extenuating Circumstances exception must complete Housing Counseling from a HUD approved housing counseling agency. Extenuating Circumstances Exception participants must:
- Receive homeownership counseling or a combination of homeownership education and counseling provided that each participant receives, at minimum, one hour of one-on-one counseling.
- Counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of that event or reoccurring.
- Counseling must be completed a minimum of thirty (30) days PRIOR TO LOAN APPLICATION but no more than six (6) months prior to submitting a loan application to a lender.
- Housing counseling may be conducted in person, via telephone, via internet, or other methods approved by HUD. For a list of HUD approved counseling agencies in California, you can view online here – HUD Counseling Providers Online, or call 1(800) 569-4287.