Back to Work – Extenuating Cirumstances

Written By: Glenn Michaels, Op-Ed Contributor

When reviewing a credit report for a mortgage loan where you find derogatory credit on the credit report always find out what contributed to the derogatory credit.

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Loan applicants that can provide evidence that the derogatory credit was due to loss of employment or other extenuating circumstances as defined in Mortgagee Letter 2013 – 26 can obtain mortgage financing sooner than later than other applicants with the same derogatory credit.

If an applicant can provide evidence that they suffered an Economic Event and can document that:

Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
The borrower has demonstrated full recovery from the event; and
The borrower has completed housing counseling

Underwriters must use parts ML – 2013 – 26 for borrowers who receive a “REFER” from TOTAL or an “ACCEPT” that is manually downgraded.

In addition besides meeting the conditions of ML 2013 – 26 must meet all other applicable FHA eligibility and policy criteria.

What is an Economic Event? It is any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more a period of at least six (6) months.

The Onset of an Economic Event is the month of Loss of Employment

Recovery from an Economic Event is the re – establishment of Satisfactory Credit for a minimum of twelve (12) months.

Household Income is the gross income for all members of the Household used for the purpose of qualifying for the mortgage loan.

If an applicant for a mortgage loan demonstrates that their credit issues have been resolved by:
Showing no history of delinquency rental housing payments and
No more than one thirty (30) day delinquency on payments due to other creditors and
No collections accounts/court records reporting other than medical

The lender must verify and document the Loss of Employment as it is contained in ML 2013 – 26. The lender also must also verify the Post Economic Event Income and a Satisfactory Credit Analysis as contained in the same Mortgagee Letter.

The waiting times for applicants that can provide evidence of an economic event as contained in ML 2013 – 26 is reduced to 12 months for applicants that recently had:
Bankruptcy (7 and 13)
Short sale

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Not all applicants with derogatory credit are bad credit risks. Sometimes things happen beyond the control of the borrower and how long does an applicant pay for this Economic Event?

About The Author

Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 


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