Monday, March 17, 2014

The Back to Work Lending Program Changes the Future of Mortgages

What happened in 2008 and what the Back to Work loan program is doing now

When a dramatic rise of mortgage delinquencies and foreclosures began to spark in 2007, the housing market had no path of return after many financial institutions closed their doors by Sept. of 2008. Housing experts note that the crash’s main cause was sub-prime lending; this is referring to loan arrangements with high interest rates for borrowers with poor credit histories.

From 2004 to 2006, sub-prime mortgages rose from 8 percent to 20 percent, according to the University of North Carolina’s Department of Statistics. Over 90 percent of sub-prime mortgages in 2006 were adjustable rate, meaning its rate will change in accordance with the market’s conditions. By 2007, adjustable rates began to reset with higher interest rates, causing higher monthly payments for borrowers. The number of mortgage delinquencies began to soar and global investors became uninterested in purchasing mortgage-related securities.

Borrowers began to dramatically change financial paths, applying for foreclosure, short sale, deed-in-lieu, forbearance agreement, loan modification, Chapter 7 bankruptcy and Chapter 13 bankruptcy. The Federal Housing Administration (FHA) now calls each of these financial situations “economic events,” which happen in result of a loss of employment or income of 20 percent or more for a period of at least six months.

After five years of battle, the FHA developed the “Back to Work - Extenuating Circumstances” program to help recovering families. Traditionally, lending agencies required borrowers to wait several years before applying for a new mortgage loan after an economic event. Through the program, families may apply for a new mortgage only 12 months after losing a home. Borrowers may put down 3.5 percent on a mortgage with no premiums nor fees at closing.

Lenders must be able to verify and document a borrowers’ loss of employment or income through a written document that shows evidence of a termination date or where a prior employer is no longer in business.

Interested borrowers are required to complete housing counseling, which is a one-hour session with an expert approved by the U.S. Department of Housing and Urban Development. Counseling must address the cause of the economic event and may be completed in person, online or by phone.

Mortgagee Letter 2013-26 states, “Housing counseling is an important resource for both first-time home buyers and repeat home owners.”

The
Back to Work lending program also requires all borrowers to have a satisfactory credit history for at least 12 months. Credit scores below 500 are not allowed in the program, but borrowers with no credit score remain eligible. Late housing, installment debt payments and delinquency negatively affect a borrower’s eligibility.

Distressed families still looking for a new home mortgage can contact a lending agency that offers the Back to Work loan program. The program runs through Sept. 30, 2016.

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