Understanding New Home-Mortgage Loans

Clarification of lenders’ jargon for FHA’s new home loans

When the Federal Housing Administration (FHA) released Mortgagee Letter 2013-26 this past August, the “Back to Work” program was launched, along with some confusing jargon. Lenders often use terms that only professionals understand to describe victims of the 2008 housing market crash and their financial experiences. Here is a guide that will help clarify your questions while learning the requirements of the program.

Borrower:
A borrower is a person who takes out a loan, promising to return the money and its interest. In the “Back to Work” program, borrowers include both the primary person and secondary person listed on the loan application.

Economic event:
An economic event is any situation that causes a borrower to lose a job or 20 percent of a household’s income for at least six months. Economic events can include foreclosure, short sale, deed-in-lieu, Chapter 7 bankruptcy, Chapter 13 bankruptcy, loan modification or forbearance agreement.

In order to prove a loss of employment, lenders require that their “Back to Work” borrowers verify a loss of employment by providing a document that specifies a termination date or where the prior employer is no longer in business.

The “onset” of an economic event describes the month that the loss of income started.

Household income:
A household income is the total earnings of every person listed on the new home-loans application. These borrowers must also be listed on documents from the family’s economic event. To be eligible, the economic event must have affected everyone in the household.

Housing counseling:
The FHA requires housing counseling for “Back to Work” borrowers, which is a one-hour session with a housing expert, approved by the U.S. Department of Housing and Urban Development. The session may be completed in person, online or by phone. It must be completed in a minimum of 30 days, but no more than six months prior to submitting an application for a new home mortgage loan. Housing counseling enables borrowers to better understand their loan options and obligations, as well as assists borrowers in the creation and assessment of a household budget. Borrowers are taught how to avoid scams and become better prepared for future financial shocks.

Recovery:
Recovery describes a borrower’s financial position after his or her credit history has been positively restored. To be eligible for the “Back to Work” program, a borrower’s twelve-month credit history must be clear of late housing, installment debt payments, delinquency and other derogatory credit issues. Credit scores below 500 are not eligible for the program, but borrowers with no credit score remain eligible.

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