Back to Work Extenuating Circumstances
Mortgagee Letter 26-2013
HUD has announced the addition of loss of income as an extenuating circumstance to credit underwriting in certain circumstances for Purchase transactions only, effective for case numbers ordered on or after August 15, 2013 through September 30, 2016. Existing Essex Credit score overlays still apply.
Borrowers that may be otherwise ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage if the borrower:
1. Can document that the delinquencies and/or indications of derogatory credit are the result of an Economic Event as defined in this ML,
2. Has completed satisfactory Housing Counseling, as described in this ML, and
3. Meets all other HUD requirements (including ratio, income, asset, reserves, property, etc.)
It is highly recommended that you read the entire Mortgagee Letter 2013-26 for complete details
An Economic Event: any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of 20% or more for a period of at least six (6) months.
The Onset of an Economic Event: the month of Loss of Employment/Income.
Recovery from an Economic Event: the re-establishment of Satisfactory Credit for a minimum of 12 months. *
The term borrower includes borrowers and co-borrower.
Borrower Household Income: the gross income of the borrower and all Household Members, as defined below, for purposes of assessing loss of income. The gross income of each Household Member must be computed in accordance with FHA income requirements.
Note: Household Member, for this purpose means an individual residing at the borrower’s primary residence at the time of the Economic Event and who was a co-borrower on the borrower’s previous mortgage.
Satisfactory Credit : The borrower is deemed to have satisfactory credit if:
the borrower’s credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
Any open mortgage is current and shows 12 months satisfactory payment history. Mortgages may have been brought current through loan modification, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s).
Loss of employment or reduction or loss of income can be verified:
Verification of a reduction in the borrower’s Household Income of 20% or more for a period of at least 6 months that resulted from the Loss of Employment, Loss of Income, or a combination of both.
A. Loss of Employment
1. A written Verification of Employment (VOE) evidencing the termination date or in cases where the prior employer is no longer in business:
2. a written termination notice, or
3. other publicly available documentation of the business closure, and
4. documentation of receipt of unemployment income.
B. Loss of Income
The lender must verify and document the Borrower’s Household Income prior to Loss of Income by obtaining:
1. a written VOE evidencing prior income; or
2. signed tax returns or W-2s evidencing prior income.
For a Loss of Income based on seasonal employment, the lender must verify and document a two year history of seasonal employment in the same field just prior to the Loss of Income, in addition to meeting the documentation requirement above.
For a Loss of Income based on part-time employment, the lender must verify and document a two year history of continuous part-time employment just prior to the Loss of Income in addition to meeting the documentation requirement above.
Note: Even if the Household Member (as defined in this ML) is not an applicant on the current loan, the lender is responsible for obtaining the necessary authorizations to verify Household Members employment or income as part of the requirement to document reduction in household income at the time of the event.
Economic Event-Related Payment or Credit deficiencies: (Collections and Judgments, mortgage foreclosure, short sale, Chapter 7 or 11 BK)
To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:
a) The borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
b) The borrower’s derogatory credit occurred after the Economic Event Onset, and
c) The borrower has re-established Satisfactory Credit for a minimum of 12 months.
If the Chapter 13 Bankruptcy was not discharged prior to loan application, the lender must also verify and document that the borrower has received written permission from the Bankruptcy Court to enter into the subject mortgage transaction .
1. Satisfactory Housing Counseling: Requirements
To qualify under the guidelines of the mortgagee letter, borrowers must:
- receive homeownership counseling or a combination of homeownership education and counseling provided that each participant receives, at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies**. The counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of reoccurrence. The housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an on-line course, and
- be completed a minimum of thirty (30) days but no more than six (6) months prior to application.
**A list of HUD approved agencies can be located online at: http://www.hud.gov/
REQUEST FOR WAIVER OR RESOLUTION OF CAIVRS INDICATOR:
In accordance with Handbook 4155.1, mortgagees are required to screen borrowers through CAIVRS. If CAIVRS screening indicates that the borrower has had a claim paid within the previous three years on a loan insured on the borrower’s behalf by FHA, the lender may submit a request for waiver or resolution of the unresolved CAIVRS indicator.
Prior to submitting the request for waiver or resolution by HUD, for loans that meet the requirements found in this Mortgagee Letter, the DE underwriter must:
- Fully underwrite the application to determine all other eligibility requirements have been met; and,
- Approve the loan subject to additional conditions.