If you’re having difficulty obtaining a mortgage loan after foreclosure through the FHA’s “Back to Work” Program, you’re not alone. Lenders are imposing stricter criteria than ever before given the economic events of the recent past. Even with programs like the FHA’s “Back to Work” Program, specifically designed to make it easier for subprime borrowers to purchase after foreclosure, many borrowers are finding themselves subjected to stringent guidelines by many lenders and ultimately being denied a mortgage loan. There are even some lenders that previously offered this option to customers but are now ceasing to loan through this program.
If you are considering applying for an FHA “Back to Work” loan after foreclosure or short sale, or have had your application denied, understanding the most common reasons why these applications are being denied will help you overcome these obstacles moving forward.
1) Stricter Guidelines for the Secondary Market
If the FHA feels that a lender did not adhere to underwriting guidelines they may refuse to insure the loan, leaving the lender to cover the costs of the loan on its own. To avoid finding itself in this scenario, lenders have become far more meticulous in their examination of a borrower’s capacity to adhere to the loan’s terms. Most lenders already want to see a wealth of “compensating factors”, such as a higher down payment, sufficient reserves, good credit score, to offset negative aspects of an application. In the case of the subprime borrowers for whom the FHA “Back to Work” Program was designed, it’s often difficult to demonstrate enough compensating factors to appease an already hesitant and scrutinizing lender.
An applicant for the FHA “Back to Work” Program should be able to be to prove the existence of extenuating circumstances leading up to foreclosure or short sale, and demonstrate that the financial situation of the borrower has changed. As many lenders are inspecting applications more critically, sadly, many potential borrowers are failing to provide the necessary evidence required to satisfy a lender’s scrutiny.
2) Lack of Proper Documentation
An underwriter for an FHA “Back to Work “Loan will want to see an undeniably clear demonstration that an employer driven, “economic hardship” existed, resulting in at least a 20% loss in income for a period of 6 months or longer leading up to a foreclosure or short sale. An underwriter will also want you to demonstrate that your financial situation has tangibly improved. Demonstrating both will require procuring the following documents:
- Copy of last two paystubs for all borrowers (showing year-to-date earnings)
- Letter of Explanation for foreclosure or short sale. Must include a very clear timeline and clear understanding of how the drop in income caused your foreclosure or short sale.
- Copies of last two months bank statements for all accounts (All Pages)
- Verification of any other income (Rental Agreements, Social Security, Etc.)
- Copy of 2012 & 2011 W-2’s (1099’s for self-employed)
- Copy of signed 2012 & 2011 Tax Returns (1040 & schedules)
- To prove drop in income you may be required to also show 2008 or 2009 tax returns.
- Most recent copies of any asset reserve statements (401K, IRA’s, Stocks & Bonds, Etc.)
Also, keep in mind that lenders are primarily looking for loss of or change in employment. Life decisions such as divorce or expanding your family may not necessarily qualify even if they resulted in increased expenses or the required 20% loss of income. Even loss of rental income will not qualify because non payment on an investment property is a risk you chose to take.
Timing is also an important factor. Cases with a documented 20% loss of income due to changes in employment also need to show that the borrower’s default directly coincided with the decrease in income. Files showing a default prior to a documented hardship will not be eligible.
You may have procured all the required documentation and still been denied. It happens. In such a case, it may very be the fault of an originator who was not well versed in the “Back to Work” Program.
3) Inexperienced Loan Officers
As with many government initiated programs, all the kinks in the program won’t be worked out until after it’s been implemented. The FHA “Back to Work” Program is still brand new, and many novice and even veteran loan officers may not yet fully understand exactly who qualifies and who doesn’t under the guidelines for the program. It is difficult to find mortgage bankers who specialize in lending to borrowers after foreclosure, let alone those who can claim expertise in the FHA “Back to Work” Program. It is absolutely imperative, if you’re a subprime borrower looking to purchase through the “Back to Work” Program, that you find a loan officer that knows what they’re doing. As a borrower, do your best to find a loan officer that won’t make too many promises about rates and closing costs upfront, and one who makes every upfront effort to verify whether or not you qualify. Underwriters are also nervous about approving these loans because they have to put their neck out and make sure that you can qualify unequivocally. Since these loans are all manually underwritten, If the underwriter approves your loan and HUD disagrees with their opinion, then they are responsible and on the hook.
For more information about the “Back to Work” Program, and to see if you qualify, contact us at firstname.lastname@example.org.