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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2014

Ready to Employ “Back to Work” Loans?

The Federal Housing Administration recognizes extenuating circumstances

The Federal Housing Administration (FHA) Back to Work — Extenuating Circumstances loan program is aimed at borrowers whose credit has been tarnished by late payments, foreclosure and/or bankruptcies, usually as a result of the financial crisis. Understanding how to identify and document these types of loans per FHA requirements will help you expand your origination products with minimal extra time needed for vetting.


In the recession, many people experienced economic events that caused a dramatic decline in their income because of a job loss or other event that substantially reduced their household income. The FHA’s existing credit guidelines didn’t address the impact of these economic anomalies, so the administration came up with a program tailored to borrowers affected by these events.

The program, announced this past year, is for purchase-money mortgages only and is scheduled to run through September 2016. The FHA has detailed guidelines for these loans, so understanding and using the nuances of the program at first may seem like searching for a needle in a haystack for originators and their clients.


The Back to Work program is built on the premise that because of certain extenuating economic circumstances, a person’s credit history is not necessarily a true reflection of future loan-payment behavior or capacity for debt. The program is stringent about the information required to prove the impact of a major economic event, requiring a borrower to show a 12-month record of on-time housing payments and undergo housing counseling to ensure that the borrower is not taking on more debt than can be afforded.

The FHA grants loans to borrowers affected by major economic events provided they can prove the negative financial impact of the event and submit indisputable evidence that their tarnished credit was a direct result of job loss or severely reduced household income beyond their control. In addition, borrowers should be able to show that they have recovered financially from the event in question.

Only FHA-approved housing counseling may be used. This counseling may sometimes be a turnoff that loan officers and borrowers wish to avoid, but it’s a good opportunity for your clients to re-evaluate their current financial positions. It also will help them understand qualified mortgage guidelines, as well as better prepare them to weather future financial crises.

Making the program work

When using the Back to Work program, providing a detailed cover letter to the underwriter about the borrower’s credit issues will help immensely. Cover letters are an often-beneficial tool and a good way to ensure that you and the underwriter are on the same page. Without these letters, loans of this type may be more prone to misunderstanding or to being declined in the underwriting stage.

Don’t risk losing your borrower’s trust with delays or denials upfront because of a miscommunication on the loan. With special-program loans, you may have only one chance to make an impression on the underwriter, and you don’t want it to be the wrong one. Underwriters exist to weigh the risks of a loan, and with this type of loan program, issues about borrowers’ income and credit are critical factors.

It is also a good idea to run these loans through the FHA’s online Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard. A “Refer” recommendation from the TOTAL system or an “Accept/Approve” recommendation that is manually downgraded by the underwriter is required for Back to Work loans. Running the loan through TOTAL in advance and having the “Refer” recommendation in hand can be a timesaver because the underwriter won’t have to do the manual downgrade later.

Aside from the specific circumstances addressed by the Back to Work program, all other FHA guidelines apply. Therefore, be sure the complete loan file is documented properly to avoid losing the loan because of a violation of a standard FHA guideline, which may happen if you focus solely on the criteria specific to the Back to Work program.


It’s important to understand the terminology and measuring points used for this FHA program, so let’s take a look at some frequently used terms.

  • Economic event: It is a circumstance out of the borrower’s control that results in a significant drop in personal or household income, including job loss. This is calculated as an income loss of 20 percent or more for a period of no less than six months.
  • Onset of an economic event: It starts the month that the income is reduced or a job is lost.
  • Recovery from an economic event: It is the re-establishment of satisfactory credit for a minimum of 12 months.
  • Borrower or household income: It is the gross income based on FHA income-calculation requirements and includes anyone living in the home at the time who was a co-borrower on the previous mortgage. Only the primary borrower’s income is used to qualify for the new loan, even if the co-borrower was on the previous loan.
  • Satisfactory credit: It is clean mortgage, housing, installment and revolving accounts during the past 12 months. Housing may include a mortgage that has a permanent or temporary modification, as long as the past 12 months have been paid on time. Nontraditional credit is allowed, provided that in the past 12 months there have been no late payments for rental housing, no more than one 30-day-late payment with other creditors, and no collections or court records other than medical or identity-theft issues.


To qualify for this program, extensive documentation proving loss of income and/or employment is required from borrowers. Loss of employment may be documented with a written verification of employment (VOE), including termination date. If the employer is out of business, requirements are a written termination letter, publicly available documentation of business closure and documentation of the receipt of unemployment income.

Loss of income must be documented by a written VOE showing past income and signed tax returns or federal W-2 forms showing past income. Seasonal employees must show a two-year history of seasonal employment that occurred before the loss in income. If your borrower worked a part-time job, this too requires establishing a two-year history of part-time work before the loss-of-income event. Current income is used for qualifying purposes.

Even if the previous co-borrower is not on the new application, in order to verify household income loss it’s necessary to document the income history of the co-borrower during the period when the income was reduced. A clear Credit Alert Verification Reporting System report indicating that the FHA has not paid a claim within the last three years is also required.

When lenders review a borrower’s credit history for events to qualify for this program, they need to see that they occurred within the time frame of the income loss and not before. The income loss should be attributed to borrowers who were successfully managing their debt obligations until the income reduction made them unable to do so.

The borrower must have clean credit for the past 12 months, and collections and judgments during that time must be as a result of income loss. These collections and judgments may include bankruptcies, foreclosures, short sales and deeds-in-lieu of foreclosure. If a Chapter 13 bankruptcy has not been discharged prior to the loan application, the borrower would need to get permission from the bankruptcy court before taking on a new mortgage obligation.

•  •  •

The FHA’s Back to Work program is a valuable resource for originators and their clients, which makes homeownership a possibility for borrowers who may have thought they were shut out of the market forever. The program is a powerful financial option best utilized with an understanding of its guidelines and nuances, as well as thorough documentation.  


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