Helping the Troubled Borrower Reenter the Market
It’s good news for the troubled borrower: In the August 2013 Mortgagee Letter, the Federal Housing Administration (FHA) ruled that buyers who lost their homes or experienced default caused by certain “economic events” would have the opportunity to reenter the mortgage market much faster than before.
While the prospect is exciting to those buyers who may have experienced default due to sudden economic changes, mortgage professionals must still work to identify those in the market who represent low risk beyond a problematic credit history. Proper verification and risk management can help you confidently corner a market that’s rich with new opportunity.
The FHA’s new rules extend only to buyers who have experienced an “economic event.” This can be something that resulted in a severe reduction of income or unemployment, causing a homeowner to default on payments or lose a home via foreclosure sale, deed-in-lieu or foreclosure.
Depending on the circumstances, a troubled borrower could potentially reenter the market between one and three years after experiencing such an economic event and losing a home. The idea is to recognize buyers who have experienced hardship through no fault of their own and to stimulate a sluggish real estate market by enticing even struggling buyers to reconsider their options.
The new rules for FHA loans don’t apply to just any buyer. A buyer must first demonstrate a willingness and ability to come back from a devastating loss. First, the original default circumstances must be proven to be beyond a homeowner’s control, such as a layoff or demotion. A borrower must then prove full recovery from that event, such as a new, better-paying job and a clear credit history for six to 12 months. Finally, the FHA requires that a buyer undergo housing counseling to fully understand options, budgeting and credit obligations in the future. These requirements must be fulfilled before the new rules can apply to a borrower coming back from a financial hardship.
Risk assessment and protection
While targeting the troubled borrower could mean an increase in accounts, it also could mean assuming new risk. The FHA’s rules surrounding borrower reentry to the market protect you to some degree, ensuring that an economic hardship was short-lived and that a buyer is fully capable of meeting credit obligations in the future. Still, mortgage professionals should tread carefully before extending loans.
By putting together a complete customer profile, you can more fully assess a customer’s ability and propensity to keep up with mortgage payments. By looking at the full picture to analyze a potential buyer’s assets, other credit obligations, payment history and employment verification, you can easily target the safest prospects.
A customer who has completely recovered from a negative economic event and is ready to start again can make a valuable addition to your portfolio. By doing your homework, you can combat unnecessary risks while still helping a troubled borrower reclaim the dream of home ownership.
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