Extenuating Circumstances
By Tyler Plack
Tyler Plack is the President of South River Mortgage. Tyler holds an active FHA Direct Endorsement (DE) underwriting certification and is the author of The Retirement Solution: Maximizing Your BenefitTyler is a seasoned entrepreneur and real estate investor renowned for his expertise in reverse mortgages and his commitment to addressing seniors' equity challenges. Tyler brings a unique perspective to his ventures, having built several successful companies throughout his career. His insights are frequently sought by industry publications, where he is recognized for his vast knowledge in the realm of reverse mortgages.
An avid investor in income-producing properties, Tyler is dedicated to helping seniors navigate their financial needs with compassion and expertise. When Tyler is not helping solve America's retirement crisis, he is a skilled pilot flying airplanes for fun.
The Federal Housing Administration (FHA) sets certain credit requirements for HECM loans as well as certain property charge requirements. If these requirements are not met, then the HECM loan may still be approved if certain criteria can be met.
Rather than automatically denying a loan if the requirements are not met, the FHA requires lenders to determine if these late payments may have been due to extenuating circumstances.
Extenuating circumstances are items outside of the direct control of the borrower that have caused the borrower to be late on payments or other obligations.
Lenders can approve borrowers with credit history that does not meet the requirements if they can successfully document that the reason was due to an extenuating circumstance.
Examples of extenuating circumstances
The following examples are provided by the Federal Housing Administration in the Single Family Housing Handbook, HUD 4000.1
- Death of spouse
- Divorce
- Unemployment
- Reduction in work hours
- Furlough
- Emergency medical treatment or hospitalization
- Emergency property repairs not covered by insurance
- Other causes that directly resulted in late payments of obligations
The Federal Housing Administration gives lenders tremendous discretion when approving extenuating circumstances. It is important to make sure you are working with a lender that understands to properly apply an extenuating circumstance to your situation.
How Lenders Review Extenuating Circumstances
The Federal Housing Administration requires lenders to verify several items when reviewing extenuating circumstance. Lenders must check the extenuating circumstance against the following items:
- There was a measurable impact between the extenuating circumstance and the outcome on the borrower’s finances
- The borrower did not take any action to make their situation worse (e.g. opening new accounts, taking on additional debt)
- It must be unlikely for the extenuating circumstance to occur again after obtaining the new loan
- The borrower has financial means through other assets, sources of income not considered in the current financial assessment, or other factors that allow the borrower to endure financial challenges
Documents to Prove Extenuating Circumstances
Since lenders have so much discretion to approve extenuating circumstances, it is important that the extenuating circumstances are documented properly.
The lender will require a letter of explanation and some form of documentation to verify the claims of the borrower.
The documentation that the lender may request may be different depending on the individual situation.
If the extenuating circumstance was due to divorce, then they may ask for a letter of explanation and a divorce decree. Or, if the extenuating circumstance was due to the death of a spouse, the lender may ask for a copy of the spouse’s death certificate.
