FHA Extenuating Circumstances

FHA Extenuating Circumstances

  • Overview of FHA seasoning rules following major derogatory events
  • Existing exceptions to those rules prior to 8/15/13
  • Review of *NEW* HUD exception rules (“Back To Work”) effective 8/15/13 and Derogatory Credit Rules effective 10/15/13
  • Today’s credit standards
  • Perspective: how to promote business using this information

Chapter 7 Bankruptcy

  • Period since bankruptcy: chapter 7 discharge date
    • FHA & VA = 2 years
      • 1 year with extenuating circumstances
    • USDA = 3 years
      • case by case with extenuating circumstances
    • Conventional
      • Fannie Mae = 4 years
        • 2 years with extenuating circumstances
        • Multiple BKs = 5 years
      • Freddie Mac = 4 years
        • 2 years with extenuating circumstances
        • Multiple BKs = 5 years

Chapter 13 Bankruptcy

  • Time period since foreclosure
    • FHA = 3 years
      • 1 year with extenuating circumstances
    • VA = 2 years
      • 1 year with extenuating circumstances
    • USDA = 3 years
    • Conventional
      • Fannie Mae = 7 years
        • Extenuating circumstances = 3 years (90%) LTV max/purchase principal residence
      • Freddie Mac = 7 years
        • extenuating circumstances = 3 years

Bankruptcy & Foreclosure Together

  • Many debtors abandon homes inside BK filing
  • Abandoned home = foreclosure seasoning supersedes BK seasoning
  • Foreclosure 3 yrs old but BK filed on deficiency balance
  • BK seasoning can be used

Short Sale: Standard Seasoning Rule

  • Time period since short sale: pre-foreclosure sales
    • FHA = 3 years
      • 1 year with extenuating circumstances
      • 1 day if HUD mortgagee letter 09-52 requirements are met
    • VA = 2 years
      • extenuating (same as FHA)
      • addition restrictions if short sale was on VA-loan
    • USDA = 3 years
      • extenuating circumstances case by case
    • Conventional
      • Fannie Mae
        • 2 years = with 20% down
        • 4 years = with 10% down
        • 2 years = with extenuating circumstances and 10% down
      • Freddie Mac = 7 years
        • 2 years = with extenuating circumstances

Extenuating Circumstances

  • Definition
    • “An extenuating circumstance is a non recurring or isolated circumstance, or set of circumstances, that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information.”
  • Examples
    • Acceptable
      • Employment relocation or deployment.
      • Death of co-wage-earner (or death of close family member with serious expense increase to Borrower)
      • Debilitating illness/sickness with corresponding loss of income
      • Severe & sudden medical expenses
      • Business failure (self employed) if *NO* prior bad credit, failure not caused by Borrower misconduct and Borrower secured permanent job in same field or better
    • Not acceptable
      • Divorce, co-signing for 3rd party, “home upside down”, general financial mismanagement
  • If proven satisfactorily, lessens FHA seasoning period to 1 year (typical) since derogatory credit event

Rules for Documenting Extenuating Circumstances

  • Detailed written letter from Borrower explaining the events with dates/causes (they were beyond control, are unlikely to occur again & recovery has finished)
  • Supporting 3rd party documentation that can be verified.
  • Evidence of re-established credit.

Extenuating Circumstances Examples

  • FHA qualifying 1-Day after short sale
    • HUD mortgagee letter 09-52 (December ‘09)
    • Not eligible if
      • Borrower pursued short sale to exploit declining market & purchase home similar/superior size within reasonable commuting distance (“strategic default”)
      • Late mortgage payments occurred within 12 months preceding short sale date
    • Eligible if
      • Short sale due to “extenuating circumstances.”
      • No 30-day mortgage lates during 12 months preceding short sale date.
      • No 30-day lates on installment debts (e.g. auto loan, student loan, etc.)
      • No deficiency balance resulting from short sale.
      • Mortgage involved in short sale was not an FHA loan.

Important Dates

  • Seasoning periods since derogatory events depend on specific dates
  • Foreclosure: date of trustee/foreclosure sale (not dates on credit report)
  • Short sale: date of notarized grant deed *NOT* recording date
  • Bankruptcy: discharge or dismissal date
  • Loan modification: date of loan modification
  • Date of application/credit pull *NOT* date of closing on new purchase loan

What’s new?

  • “BACK TO WORK” HUD/FHA MORTGAGEE LETTER 2013-13 dated August 15, 2013

4 Essential Facts of “Back to Work”

  • Eligibility for FHA financing 12 months after derogatory credit event if
    • Clearly caused by “economic event”
    • Good credit prior to “economic event”
    • Re-established good credit For 12 months since derogatory credit event
    • Undergone special HUD counseling

“Back to Work” Economic Event

  • What qualifies as an “economic event” ?
    • An occurrence beyond borrower’s control resulting in loss of income or employment or a combination of both
    • The economic event exists if it lasted 6 months or more and resulted in at least 20% reduction in household income of borrowers

“Back to Work” Burden of Proof

  • Income documentation to verify income prior to economic event
    • W2’s, Paystubs, VOE etc.
  • •Proof Of economic event
    • Employer severance letter, furlough letter, proof of cut in no of hours, receipt of unemployment insurance etc.

“Back to Work” Credit Analysis

  • Analyze any derogatory credit including late installment payments caused by economic event? Or pre-existing pattern of late payments?
  • (i) Sudden economic event/beyond borrower control
  • (ii) General mismanagement/inability to manage debt
  • (III) Disregard for credit/obligations
  • (IV) Re-established credit since completion of derogatory event (12 Months)

Extenuating Circumstances – Example of Supporting Documents Provided to Underwriter

  • Birth certificate
  • MLS listing showing when short-sale Property was listed
  • Final HUD closing statement showing when short sale property was sold
  • Copy of grant deed confirming short sale property sale date
  • Furlough letter from employer (income drop)
  • 3 Years tax returns showing previous (higher) income and gradual decrease
  • Paystubs showing decrease in income over time.
  • Medical Reports – diagnosis, surgery, medical expenses
  • Old bank statements showing depletion of savings to make mortgage payments

“Back to Work”

  • HUD counseling
    • www.hud.gov/findacounselor
    • 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

Miscellaneous Points

  • If previous loan is involved in foreclosure, short sale was it an FHA loan? Then must have been at least 12 months since FHA paid the claim to lender, not 12 months from trustee sale date
  • Files may take longer to process
  • Ideal to get an actual UW approval with PTD conditions prior to going into escrow
  • Don’t be afraid to disqualify buyers – weed out the ones that don’t fit this program rather than try to make them fit
  • IMPORTANT: Loan application CANNOT predate HUD counseling. Counseling must be completed a minimum of thirty (30) days but no more than six (6) months PRIOR to submitting a loan application.

Credit Standards

  • Fannie Mae
  • Freddie Mac
  • VA

Fannie Mae

  • Disputed credit report tradelines
    • If DU does not issue a “disputed tradeline” message there is no requirement to:
      • Further investigate the disputed tradeline on the credit report
      • Obtain an updated credit report
  • Mortgage delinquencies
    • Borrowers may not bring past-due mortgage accounts current prior to closing in order to circumvent FNMA’s policy on past-due mortgages
    • Borrowers with one or more 60, 90, 120 or 150 day lates within past 12 months will not receive favorable loan dispositions
  • Past-due, collections, and charge-off Accounts
    • For 1-unit principal residence properties, borrowers are NOT required to payoff outstanding collections or charge-offs – regardless of the amount
    • For two-to-four unit owner occupied and second homes, collections and charge-offs totaling more than $5,000 must be paid in full prior to or at closing
    • For investment properties, individual accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing


  • The lender must determine if the collection account or judgment was a result of:
    • the borrower’s disregard for financial obligations; the borrower’s inability to manage debt; or extenuating circumstances.
  • The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment.
  • The explanation and supporting documentation must be consistent with other credit information in the file.

Collections – FHA

  • There are no documentation requirements or letters of explanation required when:
    • The loan is run through TOTAL mortgage scorecard and receive an “Accept/Approve” finding despite the presence of collection accounts or judgments.
  • These accounts have already been considered in factoring the borrower’s credit score.

Collections: Capacity Analysis – New FHA Policy

  • If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, the lender must perform a “capacity analysis” which includes any of the following:
  • At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).
  • The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the credit or verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
  • If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio.

Medical Collections

  • All medical collections and charge off accounts are excluded and do not require resolution.

Judgments – New Guidance/Clarification

  • FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance.
  • Exception: Borrower has an agreement with the creditor to make regular and timely payments.The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval.

Judgments: Non-Purchasing Spouse

  • FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments (as mentioned in previous slide)

Disputed “Derogatory” Accounts

  • Accounts that appear as disputed on the borrower’s credit report are not
  • considered in the credit score utilized by TOTAL mortgage scorecard in rating the application.
  • Borrower must provide a letter of explanation and documentation supporting the basis of the dispute.
  • Disputed derogatory credit accounts are defined as follows:
    • disputed charge-off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.
  • Disputed derogatory credit accounts of a non-purchasing spouse in a community property state (California) are not included in the cumulative balance for determining if the mortgage application is downgraded to a “Refer”.
  • Non-derogatory disputed accounts are excluded from the $1,000 cumulative total.

Disputed “Derogatory” Accounts Approved By TOTAL Mortgage Scorecard

  • Disputed derogatory credit accounts greater than or equal to $1,000
    • If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is equal to or greater than $1,000, the mortgage application must be downgraded to a “Refer” and a direct endorsement underwriter is required to manually underwrite the loan as described above.
  • Disputed Derogatory Credit Accounts less than $1,000
    • If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is less than $1,000, a 37 downgrade is not required.
  • Excluded Accounts
    • Disputed medical accounts are excluded from the $1,000 limit and do not require documentation.
    • Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the lender must provide in the case binder a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report documenting the fraudulent charges.

“Non-Derogatory” Disputed Accounts

  • Non-derogatory disputed accounts include the following types of accounts:
    • disputed accounts with zero balance, disputed accounts with late payments aged 24 months or greater, and disputed accounts that are current and paid as agreed.
  • If a borrower is disputing “non-derogatory” accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the lender is not required to downgrade the application to a “Refer.”
    • However, the lender must analyze the effect of the disputed accounts on the borrower’s ability to repay the loan. If the dispute results in the borrower’s monthly debt payments utilized in computing the debt-to-income ratio being less than the amount indicated on the credit report, the borrower must provide documentation of the lower payments.

The Critical Role of the Realtor

  • Preparing a borrower for a fast and predicable
  • Closing is essential (no surprises)!
  • We are here to serve our communities
  • Providing homes for today’s homebuyer is essential for tomorrows business and a healthy community
  • The earlier your client connects with a reputable loan officer, the better prepared they will be to have a smooth and expedited closing.
  • Coach them to ask questions before meeting with the loan officer, even if they are not prepared or able to buy today
    • Your loan officer should prepare them for when they are ready to purchase
  • Confirm buyer is pre-qualified by calling the loan officer
  • Obtain pre-qualification letter on buyer from loan officer, when possible
  • Markets change

The Critical Role Of A Loan Officer & A Processor

  • Buyers don’t have access to underwriters Therefore loan officers and processors should:
    • Be experienced/skilled (in assessing derogatory events & presenting an attractive file to underwriting).
    • Be an excellent investigator to extract dates, timelines, supporting documents & present a clear-cut scenario to the underwriter.
    • Have direct access to underwriters & all latest FHA, VA, USDA, Fannie, Freddie, and Ginnie rules/updates
    • Have access to other programs with minimal or no overlays