Extenuating Circumstances

Life happens, and sometimes it means your finances take a hit.

Mortgage guidelines would seem to offer condolences, but are they real?

What you see in headlines doesn’t always translate into real-life help, and here’s why.

Let’s consider FHA loans. The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders.

FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans.

The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.

FHA has taken a stance regarding offering some leniency to families who suffered financial hardship.

For example, a borrower whose previous home was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new FHA-insured mortgage.

However, if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower and the borrower has re-established good credit since the foreclosure, the lender may grant an exception to the three-year requirement.

Extenuating circumstances include serious illness or death of a wage earner, but do not include the inability to sell the house because of a job transfer or relocation to another area.

Regarding bankruptcy: An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.

Additionally, the lender must document that the borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur.

Last, 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.

It’s all so lovely and beautiful, but here’s why it’s all essentially meaningless: FHA is not the funder of these loans, it’s the insurer.

National lenders are unwilling to extend the credit to fund loans to these borrowers, so FHA’s insurance is a moot point.

If you’ve had a bankruptcy, foreclosure, or short sale, regardless of the reason, you’ll likely be subject to the established recovery times before you’ll get your next home loan.