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New Changes to FHA Mortgagee Letter

This message was released by the U.S. Department of Housing and Urban Development covering the newest update to FHA loans.

Mortgagee Letter 2013-26

Date: August 15, 2013

To: All FHA-Approved Mortgagees

Subject: Back to Work – Extenuating Circumstances

Purpose: The purpose of this Mortgagee Letter (ML) is to:

  • Provide minimum underwriting standards and criteria for evaluating
    borrowers who have experienced an Economic Event, as defined in
    this ML, that resulted in a severe reduction in income due to a job loss
    or other circumstances resulting in reduced Household Income;
  • Describe the use of housing counseling to qualify under the provisions
    of this ML
  • Amend HUD Handbook 4155.1, Chapter 4, Section C to add an
    Economic Event to the list of examples of extenuating circumstances
    and instruct lenders to use the guidance for Back to Work –
    Extenuating Circumstances established in this ML as Chapter 6
    Section G, to underwrite an applicant with an Economic Event; and,
  • Revise HUD Handbook 4155.1, 4.A.7.e, to clarify the process for
    requesting a review of information contained in CAIVRS for
    borrowers seeking an FHA-insured mortgage in accordance with the
    provisions of this ML.

Introduction:
FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • The borrower has demonstrated full recovery from the event; and,
  • The borrower has completed housing counseling.

Housing counseling is an important resource for both first-time home buyers and repeat home owners. Housing counseling enables borrowers to better understand their loan options and obligations, and assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower.

Effective Date:
The guidance in this ML is effective for case numbers assigned on or after August 15, 2013 through September 30, 2016.