FHA Back to Work Program

Have you heard about the Back to Work program for FHA? Do you have questions on what it is or what it takes to qualify for it? Then read on as I cover the Back to Work program in detail.

When do I need the Back to Work Program?

Well, if you have significant derogatory credit in your recent past, such as a foreclosure, short sale, deed in lieu or bankruptcy of either chapter 7 , then you probably realize that there is a waiting period for you to be able to be approved for a mortgage and have it insured by FHA. The waiting periods are as follows....

Chapter 7 Bankruptcy - 2 years from discharge date.

Short Sale, Deed in lieu, foreclosure - 3 years from transfer of  deed.

FHA has always had an exception for "circumstances beyond the borrowers control" until the back to work program, this would be the death of a spouse, significant medical issues that precluded the borrower from working. It is possible to get these exceptions approved and in fact in my local branch we have had several approved in 2013, the Back to Work program is essentially a new allowable exception  for people that had lost their job or seen a significant reduction in earnings due to circumstances beyond their control.If you fall into this category than you want to keep reading to see if you qualify

How Do I qualify?

There are a few qualifications that must be met in order to make use of the back to work program

1. You must be purchasing a home, this program does not apply to refinances or reverse mortgages
2. You must be able to document a loss of at least 20% of your income for a period of at least 6 months
3. You must complete FHA's standard housing counseling
4. You must have re-established a satisfactory credit history for at least 12 months (no late payments)
5. You must meet all of FHA's other guidelines for manually underwritten loans.

If you believe you meet all of the conditions outlined above, you should call your mortgage professional and discuss the availability of this program to you.

What's the bottom line?

The bottom line is this new exception can reduce the waiting period after a significant derogatory credit event from 2 or 3 years to 1 year, but as with any exception to any rule in the mortgage industry you can expect to have a loan application heavily scrutinized and a long list of documentation that will need to be provided. w2s or tax returns showing prior earnings and w2s or tax returns showing the earnings after the economic event that reduced your income. Also you will have to provide all of the standard documentation to show that your current levels of income can support the new mortgage. In the end your mortgage professional should review your case and see if it makes sense to attempt to have a mortgage approved using the Back to Work program, if you are close to the end of a standard waiting period it may make sense to wait it out. However the Back to Work program exists to give people a second chance more quickly, if their hardships originated from matters beyond their own control. One instance where this program can be very attractive is with if you have a prior foreclosure. On a foreclosure the clock for the waiting period does not start until the bank transfers the deed of the property into their name, I have seen people come into my office 5 years after a foreclosure, thinking that they should be good based on the typical waiting periods only to find out that their clock hasn't even started because the property is still in their name. Because of situations like this, the waiting period for a foreclosure often results in a period of longer than three years, if you can document a loss of income the Back to Work program can help you get back into a house that you own in a reasonable amount of time.

What Is The Impact Of QM On The Housing Market

If  you are in the Real Estate industry chances are that you have hear about the new QM or "Quality Mortgage" rules from the CFPB. If you have heard anything about the new rules, chances are you have also heard about the impending destruction that it is going to wreak on the improving but fragile housing market. So what is the verdict, should you be losing sleep over the new rules? I'll break them down below.

What is a Quality Mortgage

A quality mortgage is any mortgage that meets the new guidelines for Ability to Repay (ATR) as published by the CFPB. The reason why anyone should care about the rules published by the CFPB is because by meeting the guidelines in their rules, lenders are afforded some degree of legal protection from lawsuits. Predictably we are seeing lenders state that they will only be writing quality mortgages once the rule takes effect on Jan. 10th 2014. In addition to the QM rules there is a special set of rules to qualify for "Safe Harbor" which means that a lender is completely protected from lawsuits on their loans and being forced to buy back any portion of their loans. Again lenders are flocking to the protections of safe harbor as congress hoped would be the case.

What is About to Change

The thought of change has many people panicking, so what changes should you be expecting? In the short term, not much. The main difference with the new rules is that the maximum fess that a buyer can pay are dropping from the current 5% down to 3%, which in certain price ranges can be problematic, but there is a very easy way around the fees, any closing costs paid by the seller are not calculated into the 3%, seller contributions therefore, will be a big part of contracts going forward. If you are a buyer and you want to make sure there are no issues with the 3 % bump up your offer by a couple of thousand dollars and include the raise in the offer as seller contributions. If you are a listing agent, prepare your seller that they may want to price a seller contribution into the listing.

Aside from the 3%, the other changes are as follows there is now a limit on the APR in order to qualify for "Safe Harbor" the APR cannot be more than 1.5% over APOR (Average Prime Offered Rate), the easiest way to make sure this isn't an issue, use seller contributions to pay the fees that are calculated into APR.

There is also likely to be a reduction in total Debt to income ratio to 43% down from 45% on conventional loans. The reason I say likely is because any loan that is eligible for sale to FNMA, FHA, VA or USDA is automatically considered "quality" and "safe harbor" for either the next 7 years or until the Freddie and Fannie are out of conservatorship or until they write their own policy for QM. FHA has already done this, adopting the 3% fee limit and the APR restriction modifying it a bit to include the APOR + 1.15 + MIP. FHA has decided to ignore the guidance on the DTI as they feel it will not allow them to fulfill their mission of helping under-served markets. I am speculating that Fannie and Freddie will both institute the 43% DTI limit, but they have yet to do so.

What's the Bottom Line?

The bottom line is that for all the talk of damage to the market, things are not going to change significantly for those who were underwriting loans for sale to Fannie , Freddie or any of the government agencies,which is just about everyone I know, The place where I could see an impact would be on Jumbo loans not eligible for sale to Fannie or Freddie, but typically Jumbo loans must meet tighter guidelines already than those that are included as part of QM.

If there is any change that needs to be considered, it will be to include seller contributions more readily in the contracts to avoid Fees limit and APR threshold.

Pre-qualification vs Pre-approval

Here in my local area, houses that are reasonably priced and in reasonable shape are flying off the market, over the past year we have transitioned from a buyers market to a sellers market, there is a lot of competition among buyers for quality properties and as such you want to be able to submit the strongest offer that you can. In order to do that, it helps to understand the difference between a pre-qualification and a pre-approval .

Pre-qualification

This is the process that most buyers go through, they speak to a loan officer, reveal as little as possible and get a pre-qualification letter to show their realtor in order to start viewing houses and submitting offers. The quality of the pre-qualification depends greatly on several factors

1. Honesty of the buyer
   many times the pre-qualification can be done without seeing any documentation at all, the loan officer just takes what the buyer says at face value. Most times, this is perfectly fine as the potential buyer is honest and up front with the loan officer, however there are times especially when dealing with a buyer that last purchased a house in the 2006 - 2008 range and experienced stated income, stated assets loans that this can be problematic.
2. The Loan Officer's knowledge in several area's
1. Agency Guidelines
   The loan officer better have a good handle on what FNMA, VA, FHA Freddie Mac or whoever the loan is going to be insured by will allow and what type of documentation is required
2. Lender Overlays
   Just because FNMA or FHA will allow something does not mean that the lender the file will be submitted to will actually accept the documentation. Many times the lenders are more restrictive than the agencies and will require additional documentation or have additional restrictions.
3. The Underwriters they are working with
   This is especially true in cases where you are looking for some sort of exception, or are looking to overcome a poor credit history or high DTI. The agency guidelines tend to give underwriters a lot of discretion when there is a buyer that doesn't meet the ideal credit profile usually citing "strong compensating factors" to ignore a rule or allow a slightly higher tolerance on a qualification parameter. This is a highly subjective phrase, and it helps to know the people that will be reviewing the file to get a gauge for what they consider "strong"

Pre-Approval

Pre-Approvals are different in that they alleviate many of the issues facing a borrower with a pre-qualification letter. For instance in order to obtain a pre-approval, the documents backing up the claims of income and assets must be submitted, this ensures that borrowers are not trying to stretch the truth a bit in order for their application to look stronger. Also we must remember that most borrowers don't know how the lender will view their situation, for instance a lender looks at w-2 income vastly different than 1099 income. Many times a potential buyer will come in after a recent promotion and thinking they are ready to purchase home come in and say I make x amount per moth, and when we receive the documentation we realize we can only count 1/3 of that income because it must be averaged over 2 years. The requirement that the documents be reviewed by an underwriter eliminates any stretching of the truth , intentional or otherwise

Also an underwriter will have reviewed the file, they have already looked at their guidelines and made any decisions on potential exceptions or extenuating circumstances, there is no ambiguity regarding what a given underwriter may think regarding a situation, you already have a decision and condition list to know what you need to obtain for a final approval.

Here at Freedom we will produce a loan commitment with out pre-approvals making the buyers offer stronger as you have basically eliminated the need for a financing contingency, we don't have to worry about obtaining a loan commitment in 10 or 15 days, A loan commitment has been submitted with the offer.

Review

The pre-qualification is a good fast and easy way to know that the potential buyer at least has a decent shot at good shot at obtaining financing. The difference is basically a prequalification says my loan officer is confident he can convince an underwriter to get me a loan, the pre-approval says my underwriter has said I can have a loan once I provide these conditions. I have been told that FNMA is now requiring pre-approvals in some cases and with the competition that is out there in this market it can only help your chances of securing a contract on the house you desire. There really is not a downside to the pre-approval process, if you start there, I am typically receiving loan commitments on the business day following submission of the application and correlating documents.

If your lender offers a pre-approval process I highly recommend it, I can't speak for every lender out there but for Freedom Mortgage the process is fast and free, and besides if the Loan Officer you are working with thinks enough of your file the submit it for a pre-approval than if the house of your dreams comes available while you are waiting for the loan commitment, there shouldn't be any issues in getting a pre-qualification letter to fall back on.