This Article Is About Non-QM Mortgage Guidelines After Bankruptcy And Foreclosure
The housing market has been bullish since 2013. Since 2013, housing prices have been skyrocketing. This holds true with poorly managed high-taxed states like Illinois, New York, and California. Both HUD and the Federal Housing Finance Agency (FHFA) have been increasing FHA and Conforming Loan Limits for the past five years due to skyrocketing home prices. The coronavirus outbreak further stimulated housing sales despite the high unemployment rate. Historic low rates have skyrocketed homebuyer demand. In this article, we will discuss and cover non-QM mortgages after bankruptcy and foreclosure.
Non-QM And Alternative Mortgage Loan Programs
FHA Back To Work Mortgage Versus NON-QM Mortgages
Home Buyers can qualify for a mortgage after bankruptcy and/or foreclosure. However, until recently, the only loan program home buyers were limited to were government and conventional loans. Unfortunately, both government and conventional loans have a mandatory waiting period after bankruptcy and foreclosure. The 2008 Real Estate and Mortgage Collapse left countless Americans filing bankruptcy and/or undergoing a housing event. The real estate market has not only recovered but home prices are appreciating nationwide. The waiting period after bankruptcy and/or housing event mandated by FHA, VA, USDA, Fannie Mae, and Freddie Mac left countless potential home buyers out of the market. The United States Department of Housing and Urban Development, also known as HUD, is the parent of FHA. FHA Loans are the most popular loan program in the United States. HUD experimented with shortening the waiting period after bankruptcy and/or housing event to one year with the now-defunct FHA Back To Work Mortgage Program. This new HUD Loan Program turned out to be a complete disaster. We will cover the HUD FHA Back To Work Mortgage Program so our viewers are familiar with how the program worked.
The Launch Of Non-QM Mortgage
The Great News is that NON-QM Mortgage was launched in 2013. More and more non-QM loan programs were launched every year. NON-QM Mortgage Guidelines have no waiting period requirements after housing events such as a prior foreclosure, deed in lieu, and short sale. Borrowers with a prior bankruptcy can qualify for NON-QM Mortgage with no waiting period if they do not have a mortgage part of Bankruptcy. With the mortgage part of bankruptcy, then there is no waiting period after bankruptcy with NON-QM Mortgage Loans.
The Ill-Fated FHA Back To Work Mortgage
The creation of FHA Back To Work Mortgage by HUD was to shorten the waiting period to one year after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. The traditional waiting period to qualify for FHA Loans after Chapter 7 Bankruptcy is two years from the discharge date. There is a three-year waiting period after a foreclosure, deed in lieu of foreclosure, and/or short sale to qualify for an FHA Loans. This mortgage loan program is a manual underwrite mortgage loan program. Had strict mortgage lending guidelines and it was not for everyone. To qualify for this one year after a bankruptcy and/or foreclosure mortgage program borrowers needed to have been out of work. Due to being out of work, this was a reason for them filing bankruptcy and/or having a housing event. Lenders who were participating were extremely careful to make sure borrowers met guidelines set forth by HUD. Remember that all of these applications are manual underwrites. The mortgage underwriter needed to follow the Mortgagee Letter from HUD. There were many underwriter’s discretion issues and the guidelines were not clear. Just because one underwriter denies a mortgage application does not mean another underwriter will deny. I had half a dozen cases where I got denied from one mortgage lender but got it approved by a different underwriter.
Case Scenario Where One Lender Denies Back To Work And Another Lender Approves
Here is how HUD structured the FHA Back To Work Mortgage :
To qualify borrowers needed to have been either laid off. Or, the company needed to have shut down causing forced unemployment or underemployment and due to the unemployment. Borrowers were forced to either file bankruptcy, have a foreclosure, deed in lieu of foreclosure, or short sale due to at least a 20% reduction of household income for at least six months. A voluntary resignation or quitting a job disqualified borrowers. Reduction of income due to divorce or other extenuating circumstances disqualified borrowers. A self-employed person whose business went out of business due to the economy did not qualify because HUD views a failed business as a calculated risk. The only way borrowers qualified was if terminated from their employer. Proof of involuntary termination was required.
Cases Scenario On FHA Back To Work Mortgage
A recent case scenario of a loan that I closed for a borrower was when I took on a file where a borrower lost his job due to the employer not extending his employment contract.
- The Back to Work mortgage underwriter did not view this as an involuntary termination
- I disagreed with the underwriter’s decision
- The underwriter will not budge and stayed firm with his denial
- I then took the file to a different wholesale lender
- That underwriter agreed that my client’s not getting an employment contract renewed fit the FHA Back To Work Mortgage Guidelines
- This being the cause of his unemployment qualified him for the Back to Work extenuating circumstances due to an economic event mortgage loan
- The borrower eventually got his mortgage approved and we ended up closing on the loan
- Again, just because one mortgage underwriter does not felt that an applicant did not meet the mortgage lending guidelines of the Back to Work Mortgage program did not mean a different underwriter will not approve the loan
Again, this loan program was a total failure.
Credit Guidelines With FHA Back To Work Versus Non-QM Mortgage
Credit report and credit history will be scrutinized by mortgage underwriters:
- Borrowers were expected to have had perfect credit prior to his or her unemployment
- Late payments prior to his or her unemployment disqualified borrowers
- Once the mortgage applicant became unemployed, late payments and bad credit is expected and a credit score drop is also expected
- However, once the FHA Back to Work Mortgage loan applicant gets a new job, the mortgage loan underwriter expects the applicant to have no more late payments and re-established credit
- One late payment after the mortgage loan applicant re-establishes themselves can be a deal-breaker
To qualify for the FHA Back To Work, A HUD-approved housing counseling course needs to be completed for all mortgage loan applicants for this program and they cannot apply for an official mortgage loan application until 30 days after the signed completion date of the housing certificate.
Qualifying For Mortgage After Bankruptcy And Foreclosure With Non-QM Mortgage Loan Program
The FHA Back To Work Mortgage program was a complete disaster. Only a fraction of borrowers who applied for this loan program were successful and got a clear to close and closed on their home loans. An alternative to this loan program is NON-QM Loans. Gustan Cho Associates offers NON-QM Loans where there is no waiting period after bankruptcy or housing event such as foreclosures, deeds in lieu, and short sales. Depending on the borrower’s credit scores, a 10% to 30% down payment may be required and mortgage rates are normally higher than FHA Loans but it can be a great alternative for homebuyers who have not met the waiting period after bankruptcy and foreclosure.
April 25, 2021 - 5 min read