I doubt there is an active REALTOR or mortgage professional out there today that has not gotten this question, or one like it. While you always want to check with a mortgage professional to discuss your specific situation, I thought it might be helpful to help set expectations for that conversation. Since Kelli Harris with Coldwell Banker Home Loans has said it much better than I could, I thought I would relay her thoughts on this situation from an email she sent me earlier today. I hope this helps.
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I was pulling this information for an agent and thought it was good info for everyone. This pertains to getting an FHA loan after having a short sale.
A short sale or Pre-Foreclosure is the sale of a property for less than the total amount necessary to satisfy the mortgage obligation. When the mortgagor cannot sell their property for the full amount of the indebtedness, the lender will consider accepting a payoff of less than the total amount owed on the mortgage to reduce the loss incurred if foreclosed and the lender acquired the property. This will show on the credit report as a pre-foreclosure or as a mortgage settled for less than full amount owed.
Borrowers are not eligible for a new FHA-insured mortgage if they pursued a short sale (or pre-foreclosure) agreement on their principal residence simply to:
- take advantage of declining market conditions, or
- purchase at a reduced price a similar or superior property within a reasonable commuting distance.
Borrowers Current at the Time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage:
- all mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale (or pre-foreclosure sale), and
- all installment debt payments for the same time period were also made in the month due.
Borrowers in Default at the Time of Short Sale
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Note: borrowers who sold their property under FHA's pre-foreclosure sale program (PFS) are not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.
Exceptions may be considered for borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) if:
- Documentation is provided to evidence the default was due to circumstances beyond the borrower’s control (such as death of the primary wage earner, long term un-insured illness, etc.), AND
- The review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.
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