Federal Housing Administration (FHA) mortgages are now available to select borrowers only one year after a foreclosure, slashing the previous three-year waiting time by...

Federal Housing Administration (FHA) mortgages are now available to select borrowers only one year after a foreclosure, slashing the previous three-year waiting time by 66 percent. The deal isn’t available to all borrowers and it is tough to qualify after only one year, but the new provision is a major shift away from FHA’s recent restrictions.

The U.S. Department of Housing and Urban Development’s (HUD) issued Mortgagee Letter 2013-26 – Back to Work-Extenuating Circumstances,  saying “As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes…FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

The new provision allows borrowers who’ve had a foreclosure, short sale, deed-in-lieu sale or bankruptcy become a homeowner again in as little as 12 months.

Qualifying Under the Back to Work Plan

To qualify borrowers must:

  • Document that “certain credit impairments” resulted from a job loss or income loss beyond the borrower’s control. Income loss must be at least 20 percent for at least six months.
  • Complete housing counseling through a HUD-certified counselor.
  • Reestablish “satisfactory credit” for at least 12 months prior to the application for a mortgage. Satisfactory credit means no 30-day late payments for housing (rent or mortgage) or installment accounts, and no serious delinquency for any other accounts.

The letter says housing counseling is a key home buying tool for any home buyer. It helps borrowers better understand loan options and obligations, and assists them with creating and assessing a household budget, and helps them obtain reliable information and resources, avoid scams, and be better prepared for future financial shocks.

The new provision took effect Aug. 15, 2013, runs through Sept. 30, 2016 and includes purchase money mortgages in all FHA programs except of Home Equity Conversion Mortgages.

FHA Loans After Just 1 Year!?

While the new provision is a good deal, the reality is it will be tough to qualify for a new mortgage one year after a foreclosure, short sale, etc.

Hardships don’t typically occur overnight. Righting the financial ship after a storm likely also won’t happen overnight. In order to qualify within one year, you’d have to begin making  payments on time starting the very day you lose your home or discharge your bankruptcy. In reality. the plan may reduce the three-year period by only a little . Of course anything shorter than three years will make buyers happy.

In addition, the program *allows* lenders to approve mortgages under its guidelines. It doesn’t *require* them to. So mortgage lenders can continue to require longer waiting periods or better credit profiles before granting FHA mortgages to folks with iffy credit profiles.

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  • KE

    We are currently trying to navigate this new program, as we are eligible (2+ years past short sale and meet these criteria), but have been unable to find a lender who: a) has even heard of this program, b) are willing to test the waters with the exceptions, and c) are willing to pre-qualify applicants under the Back-to-Work program based on their hesitancy that the loan cannot be sold down the line. We have run our application through numerous brokers/local banks with none coming down from the 3 year post-short sale mark for FHA loans.

    Are there any lenders that have done these successfully? Searches online haven’t identified any.


    • Gina Pogol

      Unfortunately, while the government ALLOWS mortgage lenders to ease their underwriting standards under this program, it can’t REQUIRE them to. I’d expect that as mortgage applications drop off due to rising rates, mortgage lenders will be more inclined to get onboard. There are reasons that lenders hesitate to lower their standards and I’ll address them in this blog. Right now, though, I can tell you that National Residential Mortgage (Heartland Financial) is offering the program.

  • TE69

    What if the hardship/qualifying event did not directly happen to the borrower but the borrowers spouse who was not on the note? They borrower had and has perfect credit – the spouse not so much. However although the borrowers income qualified for the house the borrower relied on the spouse to help with other household items such as, oil, heat and other utilities…etc. The spouse lose their job which made it impossible for the borrower to maintain the home on one income. The spouse was/is on the deed and title but not he note. To had more fuel, how about if the borrower and spouse left the home and rented an apartment once they could no longer afford the mortgage in 2009 but the bank did not foreclose until 2014! Does this couple qualify for this so called back to work program? Is it a thing where as long as the lender approves the loan FHA will guarantee it? Or does FHA have to say okay to the qualifying event before the lender can approve the loan. Who approves the qualifying event – FHA or the lender? Mind you this couple can prove and document everything, has the funds for the new home and the borrowers income has doubled since then and the spouse will not be on the new loan again. The borrower will be able to carry the loan and the other household expenses without the spouses income.