A bankruptcy, foreclosure, or short sale should keep you from getting a mortgage any time soon, right?
The Federal Housing Administration is rolling out a new initiative known as the Back to Work Program to help borrowers who had previous mortgage troubles but have since gotten back on their feet.
Who qualifies for Back to Work lending?
Back to Work loans target people who had mortgage or credit trouble due to an economic event outside of their control. More specifically, the program requires that future borrowers prove that their negative economic event was due to a sustained 20% drop in their income for at least six months.
Here are some of the events that would qualify a borrower:
- Pre-foreclosure sale
- Short sale
- Chapter 7 bankruptcy
- Chapter 13 bankruptcy
- Loan modification
- Forbearance agreement
After properly documenting a drastic drop in income, and going through a one-hour counseling session, the FHA will essentially forgive the borrower's history.
It's worth noting that the loans are otherwise written with the same standards as any other FHA loan. Borrowers can buy a home with as little as 3.5% down, and interest rates are no different than any other FHA product. The general idea is that borrowers shouldn't be penalized for an event outside their control.
Getting a Back to Work loan
Unfortunately, not all mortgage brokers or banks are participating in the program. The biggest mortgage bankers, JPMorgan and Wells Fargo, haven't expressed interest in writing Back to Work loans.
I spoke to Denise Panza, who operates AskMortgageGal.com about the program. She said she would expect "half of FHA lenders will make this program available," later adding that lenders who use this program are those that sell loans to Ginnie Mae. So far, program participation is limited to only a few brokers, since the details weren't available until August.
Mortgage borrowers should be aware of the limitations and strict requirements of the program. Panza noted that "potential borrowers must receive home-ownership counseling or a combination of home-ownership education and counseling -- at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies 30 days prior to application."
The key word here is "prior" to application. Applicants who haven't yet completed housing counseling will be promptly denied Back to Work loans.
Neal Katz, a licensed mortgage agent in Nevada revealed that "just because one has had a hardship and can document a full recovery and takes the required housing counseling doesn't automatically mean they are approved."
That is to say, borrowers must meet all other FHA requirements, and work with an underwriter who is confident in their documentation, and the borrower's ability to repay the loan.
Even still, this program could be a great way for borrowers to start fresh after losing their home or going through bankruptcy during the financial crisis. Foreclosures have now fallen in 36 consecutive months, according to RealtyTrac.