Up until recently, a buyer was required to wait for three years from the date of a foreclosure or short sale and two years from the discharge of a bankruptcy to purchase a new home. But in August 2013, FHA introduced the “Back to Work” program. This program is designed to shorten the waiting period to 12 months.
If you take a moment and think about it, this program could potentially encompass a huge population. From 2010-2012, there were 9,881,908 foreclosure filings in the United States. This represents almost 10% of all potential home buyers under the age of 61. By understanding how the “back to work program” works, you may find a new home around the corner.
The basic premise is that potential buyers who have experienced an “Economic Event” may be able to buy sooner than what traditional guidelines would allow. To qualify you must be able to demonstrate that their credit impairment was a result of a loss of income and that you have re-established satisfactory credit for a minimum of 12 months.
So what qualifies as an economic event? FHA requires that the household income drop by a minimum of 20% for a period of 6 months. The onset of the economic event is the month the income was lost. This month becomes the focal point. First, the lender must determine whether the loss of income covers at least 6 months. Secondly, the borrower’s credit must be evaluated prior to the job loss. If the borrower has credit issues that predate the economic event, then they probably will not qualify for back to work.
Once it has been determined that the borrower’s job loss and prior credit meet FHA guidelines, then it is necessary to make sure that they have re-established satisfactory credit for the last 12 months. FHA will allow the borrower to use non-traditional credit to meet this guideline.
Base upon these requirements, it should be clear that the lender is going to need a great deal more information than normal. Because this is a niche program, lenders will be extremely cautious in their underwriting. Lenders will require the borrower to provide written evidence of when they were terminated. The lender will also require the buyer to document income before and after the economic event. Since most people struggle to stay solvent by using their savings and juggling debts, the loss of income may not immediately result in foreclosure or bankruptcy. Consequently, the lender may need to examine tax information from 4 or 5 years back.
While not everybody who has had a foreclosure will qualify for “Back to Work”. However, it does open the door for many hard working families whose current credit history is not indicative of their willingness to pay their bills on time.