|September 4, 2013
Contents: FHA “Back to Work – Extenuating Circumstance” Guidelines; Credit Qualifying Streamline Refinance Transactions Credit Scores; Short Refinances/FHA Refinances for Borrowers in Negative Equity Positions
FHA “Back to Work – Extenuating Circumstances” Guidelines
Pacific Union Financial will evaluate loans in accordance with the credit standards as outlined in Mortgagee Letter 2013-26, effective with case numbers assigned from August 15, 2013 through September 30, 2016. With the release of this Mortgagee Letter, FHA will accept an Economic Event (defined below) as an extenuating circumstance when evaluating the borrower’s credit history as part of a request for purchase transaction financing.
Under the new “Back to Work – Extenuating Circumstance” guidelines, borrowers with previous bankruptcies, foreclosures, deeds-in-lieu, short-sales, or other adverse credit that results in a TOTAL Scorecard “Refer” recommendation or the manual downgrade of an “Accept/Approve” recommendation may be eligible for FHA purchase transaction financing provided all of the following requirements are met:
- File must contain specific documentation to evidence the delinquencies were due to the Economic Event;
- Borrower must have reestablished a satisfactory credit history for at least 12 months;
- Borrower has fully recovered from the Economic Event;
- The borrower must have attended an approved housing counseling program at least 30 days but no more than 180 days prior to the initial loan application; and
- All other HUD requirements are met.
The following is brief overview of the key aspects of the requirements of Mortgage Letter 2013-26. Be sure to review the entire Mortgagee Letter for a complete understanding of all policies.
Establishing an Economic Event
HUD defines an “Economic Event” as any occurrence beyond the borrower’s control that resulted in a loss of income, loss of employment, or a combination of both. The “Onset of the Economic Event” is determined by the month that the loss of employment/income occurred. The “Economic Event” exists if the loss of employment and/or income:
- Lasted at least 6 months; and
- Resulted in a 20% or more reduction in the borrower’s household income.
To determine if an “Economic Event” occurred due to a loss in income, the household income prior to the loss must be verified and analyzed. Household income is considered the total gross income of the borrower and any co-borrower on the previous mortgage who resided in the borrower’s primary residence at the time of the “Economic Event”. Household income must be documented as follows:
- A written VOE for the 2 year period prior to the “Economic Event”; or
- Signed tax returns or W-2s evidencing income for the two year period prior to the “Economic Event”.
To determine if the “Economic Event” exists due to a loss of employment, a written VOE is required. If the previous employer is no longer in business, loss of employment should be documented as follows:
- A written termination notice; or
- Other public documentation reflecting the business closure; and
- Documentation of receipt of unemployment income.
In addition to the requirements above, for seasonal employment, a 2 year history in the same field just prior to the loss of income is required. For part-time employment, a 2 year history of continuous part-time employment just prior to the loss of income is required.
Note: If the household member is not an applicant on the current loan, authorization to verify employment or income loss to document the “Economic Event” is required.
Post “Economic Event” Income
Verification and documentation of the borrower’s household income after the “Onset of the Economic Event” must be completed in accordance with the guidance in the Handbook 4155.1 (Chapter 4, Sections D-E), ML 2012-03, and the Pacific Union FHA Loan Program Guide.
All delinquent accounts and indications of derogatory credit, including collections, judgments, bankruptcies, foreclosures, deed-in-lieu, short sales and other credit problems must be analyzed and documented to determine if the occurrence was the result of the borrowers “Economic Event”, an inability to manage debt, or a general disregard for managing financial obligations. The borrower’s credit report must be reviewed to determine if the borrower:
- Exhibited “Satisfactory Credit” prior to the “Economic Event Onset”; and
- The derogatory credit occurred after the Economic Event Onset; and
- The borrower has re-established “Satisfactory Credit” for a minimum of twelve months.
“Satisfactory Credit” is established when the borrower’s credit is:
- Clear of late housing payments, installment debt payments, and major derogatory revolving account credit issues within the most recent 12 months (excluding medical collections);
- Current on all open mortgage payments within the most recent 12 month period. If the mortgage was brought current through a “temporary” or “permanent” loan modification process, the payments must have been documented as being received in accordance with the modification agreement;
- Meets all the other requirements associated with “Back to Work – Extenuating Circumstance” guidelines.
For borrowers with non-traditional credit, “Satisfactory Credit” includes a 12 month period of:
- No history of rental payment delinquency; and
- No more than one 30 day delinquency on payments due to other creditors; and
- No collection accounts/court records (excluding medical collections and/or derogatory credit due to verified identity theft).
Documentation to support approving a mortgage loan, based on a borrower’s “Economic Event” related delinquent accounts/derogatory credit must be provided as follows:
||If credit issue is the result of a documented Economic Event
|Chapter 7 Bankruptcy
||12 months must have elapsed since the date of discharge.
|Chapter 13 Bankruptcy
||Must have been discharged prior to the loan application and all required bankruptcy payments made on-time, or a minimum of 12 months of the pay-out period under the bankruptcy has elapsed and all required bankruptcy payments were made on time.
If the Chapter 13 bankruptcy was not discharged prior to the loan application, the borrower must obtain written permission to proceed with a mortgage transaction from the bankruptcy court.
||If the CAIVRS screening indicates a claim has been paid within the last 3 years on a loan insured on the borrower’s behalf by FHA, a request for a waiver or resolution of the unresolved issue may be submitted. The CAIVRS must be cleared prior to closing.
||Must document all collections and judgments were due to economic default.
|Foreclosure & Deed-in-Lieu
||Minimum 12 months must have elapsed from the date of completion. If the previous loan was an FHA loan, 12 months must have elapsed from the date when FHA paid the initial claim to the lender.
||Any open mortgage is 0x30 in last 12 months.
||No current late housing payments or installment payment. No major credit issue on revolving.
||No lates on rental payments; max 1×30 on payments due any other creditor, and no collection / court records.
||Twelve months must have elapsed since the date of sale.
Borrower(s) are required to participate in pre-purchase homeownership counseling or a combination of homeownership education from a HUD approved housing counseling agency, state housing finance agency, approved intermediaries or their sub-grantees, or through an online course. Counseling must be completed a minimum of thirty (30) days, but no more than six (6) months prior to submitting a loan application and can be conducted in person, via telephone, via internet, or other methods approved by HUD.
The counseling fee may be funded by the borrower or the housing counseling agency, as permitted by HUD’s counseling program. All fees must be reasonable, affordable, customary and commensurate with the services that are provided.
Verification of pre-purchase counseling must be documented by a letter of completion on the Housing Counseling Agency letterhead, that includes the agency’s Tax Identification Number (TIN). The letter must also include the:
- Borrower’s name
- Counselor’s name
- Date counseling was completed
- Borrower’s signature
- Signature of an authorized official of the counseling agency
In addition, the following disclosures must be provided to the borrower in writing by the counselor:
- An explicit description of any financial relationships between the agency and any lender; and
- A statement that the borrower is not obligated to pursue a loan with a lender; and
- A statement that “Completion of this housing counseling program and receipt of a letter of completion of counseling does not qualify the borrower for an FHA loan. A lender will have to determine if the borrower qualifies for a loan. You understand that you may not be approved for a loan.”
Credit Qualifying Streamline Refinance Transactions Credit Scores
Correction: The minimum credit score for FHA Credit Qualifying Streamline Refinances is 580 when the LTV is >90%. This correction is in alignment with FHA’s policies for this LTV tier.
Short Refinances/FHA Refinances for Borrowers with Negative Equity
Correction: FHA’s maximum DTI for short refinances/FHA refinances for borrowers with negative equity positions for loans that receive a TOTAL Scorecard “Refer” recommendation is 35%/48%; it was previously 37%/49%. This correction aligns our policies with FHA’s policies.