Let's start with the bad news - in 90% of the cases, you will need to put down a significant amount of money to get into a new home (20% +). This is because the lenders are private lenders who definitely don't have access to mortgage insurance and they don't want to lend without a fallback option if the borrower goes belly up again. (the fallback option being to sell the home and recoup the money lent out.)
Here is the good news...if the 20% down is available, Homeowners Financial Group, USA, LLC, has a "Clean Slate" program designed for borrowers who need a little help. Essentially, the only waiting period is they must be 6 months from the BK. There is no waiting period for Short Sale or Foreclosure.
Now onto the new FHA "Back to Work - Extenuating Circumstances" program. While, in my own personal opinion, this new Mortgagee Letter 2013-26 is about 2 years too late. Perhaps when a borrower faces a difficult "economic event" in the future, they will be able to get into a home sooner rather than later. The idea behind this mortgagee letter, aptly titled: Back to Work - Extenuating Circumstances, is that if a borrower can establish credit history for 12 months, they are potentially eligible for FHA financing.
- This is important because FHA allows only 3.5% down payment and so the borrower who doesn't have the 20% down - could essentially get into a new home sooner.
- 12 months must have passed since the short sale or foreclosure
- Must be able to document credit impairment, i.e loss of employment or significant loss of Household Income (20% or greater) - Prove the economic event that was the trigger for the short sale/foreclosure
- Additional layers of credit requirements
- Each borrower has to go through Housing Counseling
Those you can read directly from the Mortgagee Letter. The letter gets even tougher because they really only consider those borrowers with stellar credit history who had this one time event. They can't have a history of other delinquencies with housing, no other collections, no more than 1x30 day delinquency on any debt. While this makes sense, most that have these economic events probably have had trouble with other credit lines as they worked through their difficult circumstance. Furthering the complication - it all has to be proved! That's right - the previous employer will need to show when the borrower was terminated and the loss of income will need to be proven as well (which is standard so this shouldn't be too difficult if there was in fact a loss in income).
It's not that the program won't work - it's just once again, the masses tout it as a great thing for borrowers and then we come to find that only a handful actually had this occur. Some people definitely will benefit but too many people will have one thing that doesn't quite fit and it will be more heartache to that borrower.
Ultimately, it's a good start for FHA. When life circumstances that are unexpected hit families, they shouldn't be unnecessarily punished. This will help those people who faced an economic event and had no option but to short sale or foreclose. Let's just not get too excited - it's definitely not a "Get out of Jail Free" card. If you choose to foreclosure or short sale strategically - well then, be ready to wait.