FHA Back To Work Versus NON-QM Mortgages And Pros And Cons

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FHA Back To Work Versus NON-QM Mortgages And Pros And Cons

This BLOG On FHA Back To Work Versus NON-QM Mortgages And Pros And Cons Was UPDATED On May 5th, 2019

FHA Back to Work Extenuating Circumstances due to an Economic Event mortgage loan program was launched on August 15, 2013 and many home buyers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale have taken advantage of the program. However, the program turned out to be a total flop and losing proposition where it stressed out millions of borrowers who applied for this loan program. This loan program was supposed to shorten the waiting period to one year after their bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.

  • When this FHA Loan Program first was launched, there was massive confusion not just for the mortgage loan applicants but also with mortgage loan underwriters
  • Countless of borrowers were told they qualified and were issue pre-approval letters to go and get purchase contracts
  • They were then told they were denied for the FHA Loan under this HUD program where it shortened the waiting period due to an economic event
  • Borrowers who were told they qualified and given the blessing of the lender to go ahead with the home buying process ended up not qualifying after they have had a signed real estate purchase contract
  • Most FHA mortgage application went into processing and underwriting came back as a mortgage denial.
  • Some borrowers got conditional approvals and then after the loan approval got a loan denial because underwriters did not know what they were doing
  • As time went on, mortgage loan officers, as well as lenders, fully understood what types of criteria to accept prior to accepting a mortgage loan application
  • Most lenders eliminated the FHA Back To Work Mortgage Program
  • FHA Back To Work Versus NON-QM Mortgages
  • Those who got turned down for this new FHA Program turned to NON-QM Loans and closed on their home loans

Letter Of Explanation

There are strict FHA guidelines when it comes to the qualification requirements.

  • Besides qualifying for credit and income and debt to income ratios, the first thing lenders required was a detailed letter of explanation on the circumstances that initiated the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale
  • The only extenuating circumstances allowed and permitted in order to qualify for this program is was the applicant needed to have been involuntarily out of work
  • Need to be involuntarily out of work through the following:
    • layoff
    • company downsizing
    • or the company going out of business
  • If the applicant did not get terminated involuntarily and quit their jobs due to rumors that the company was going to lay employees off or that the company was going to shut their doors, they would not qualify. 
  • A detailed letter of explanation with supporting documents was required to see if the borrower qualified  
  • The letter of explanation should detail the applicant’s following:
    • work and credit history
    • what triggered the involuntary termination
    • what the mortgage applicant did during the layoff period
    • how they went about working for work
    • how they found their work
    • what they have done to re-establish their credit after they have obtained new full-time employment

Extenuating Circumstances That Do Not Apply

To qualify for this FHA Loan Program that has shortened the waiting period after a bankruptcy and foreclosure, borrowers needed to have been voluntarily terminated from employment. Or the company they worked for needed to have been shut down or closed their branch operations. A termination letter is required or proof that the company shut its operations or went out of business.

The Great Recession of 2008 impacted thousands of businesses nationwide.

  • Many hard-working business owners had to mortgage their homes to the max to support their dying businesses
  • Ended up closing their doors and a large percentage of those business owners ended up closing their doors and had their homes foreclosed on
  • Unfortunately, under HUD’s rules and guidelines, a loss of business does not constitute being out of work and business owners who lost their business due to the economic collapse due not qualify
  • HUD, the United States Department of Housing and Urban Development, consider self-employed folks and business owners as sophisticated investors
  • Losing their business due to the economic collapse is considered a calculated risk on the business owner’s part
  • Business owners who lost their businesses and have been out of work due to their business failures did not qualify

Unfortunately, those folks with other extenuating circumstances such as divorce, medical issues, and other extenuating circumstances did not qualify.

20% Household Income Reduction

To qualify for HUD’s new program, the mortgage applicant needs to have been out of work for at least six months and had a reduction of 20% or more in their household income in order for them to qualify.  Mortgage lenders are extremely strict with the 20% household in reduction income rule.

Is Unemployment Income Counted In 20% Household Reduction In Household Income Rule?

Borrowers with unemployment income after out of work, that unemployment income will not count to calculate 20% reduction in household income qualification purposes.  The unemployment income will not count towards household income per HUD’s Guidelines under this program.

Credit Factors

There are strict credit criteria for this loan program and mortgage guidelines.

  • The mortgage applicant needs to have had good credit and no late payments until the day they have lost their jobs
  • Late payments and derogatory credit after the loss of a job was fine
  • However, after the mortgage applicant got a new full-time job
  • Need to go back to work
  • The perfect timely payment was expected
  • Lenders expected re-established credit
  • One late payment after the mortgage applicant goes back to work will disqualify from qualifying for this loan program.

HUD Approved Counseling Certificate

A HUD-approved home counseling course is required.

  • A certificate of completion of the HUD-approved housing course was required
  • Needed to be signed and dated by the HUD-approved housing counselor
  • Borrowers could apply for FHA Loans until 30 days have elapsed from the date of the housing certificate

Comparing The FHA Back To Work Versus NON-QM Mortgages

Many borrowers who asked about FHA Back To Work Versus NON-QM Mortgages. This program turned out to be a total disaster where many home buyers went through a living nightmare dealing with lenders to be told they were denied. Many turned to NON-QM Loans where NON-QM Mortgage Lenders honored the FHA appraisals and ended up closing the home loan in a matter of a couple of weeks. There is no comparison when it comes to comparing FHA Back To Work Versus NON-QM Mortgages. NON-QM Mortgages are portfolio loans where the lender holds the mortgage in house. Gustan Cho Associates Mortgage Group offers NON-QM Loans and there is no waiting period after bankruptcy and/or foreclosure.

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