FHA – Extenuating Circumstances


Effective immediately, policy changes in the way the Federal Housing Administration (FHA) views certain derogatory credit will make it easier for some borrowers to qualify for purchasing a home. Allowances will be made for certain “Economic Events” resulting in poor credit ratings, which previously would cause borrowers to be ineligible.

What do the new rules say? Potential borrowers who experienced a decrease of income by 20 percent or more for at least six months, and that resulted in serious derogatory credit such as a short sale, foreclosure, or bankruptcy, may still be eligible as long as:

  1. The loss of employment or income was due to an extenuating circumstance beyond his or her control and can be documented;
  2. A satisfactory credit history has been restored for a period of 12 months; and
  3. Housing counseling has been completed.

Other changes effective October 15, 2013 include amendments to underwriting guidelines in the area of outstanding, prior judgments and collections, including the exclusion of unresolved medical collections from the underwriting decision.

Eligible Circumstances:

-Borrower lost his job and was off work for at least 6 months and income decreased by 20% or more and is now back to work and can qualify for the mortgage

-Co-borrower on original loan lost job and household income decreased by 20% even if co-borrower is not on new loan

-Borrower overtime/bonuses were reduced resulting in a 20% loss of income, even though the borrower kept his job

Non-Eligible Circumstances:

-Borrower had a reduction of income for less than 6 months

-Borrower had a reduction of income for at least 6 months, but income decrease was less than 20%

-Borrower who has not reestablished income and credit

-Borrower with credit problems prior to the event that caused the income reduction

-Borrower who does not qualify for a mortgage based on his current income

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