FHA Time Periods For An FHA Loan After A Short Sale.

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

I have been seeing a lot of blogs on Short Sales lately, and many of them paint a very rosie picture of Short Sales.  Some of them even make it sound like the consequences to a Sale is minimal especially with FHA loans.  I have read a few that suggest that an FHA Loan on a new property can be done right after a Short Sale without any problem.  They make it sound like this is the norm rather than the exception.

MY EXPERIENCE with doing loans on Borrowers who have gone through a Short Sale is much different than this rosie picture that has been presented in these blogs.  MY EXPERIENCE has been that EVERY Borrower that I have done a loan on, that has previously gone through a Short Sale, they had gone late on their mortgage payments before the Short Sale was approved.  Not only were they late on their mortgage payments prior to a Short Sale, they were late on other monthly debts as well.

Because of the information that is being put out there is different then what I HAVE EXPERIENCED, I felt that it was time to just to put into a blog what the FHA Guidelines have to say about the time periods in which a FHA Loan can be done after a Short Sale, and the circumstances in which it can happen.  FHA Guideline 402 (l) below is exactly as it is written in the FHA Guideline Reference Book.  Read it for yourself, and come to your own conclusion on just how easy it is to do or not to do an FHA Loan after a Short Sale.

 

 

402(I) Short Sales.

A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his or her principal residence simply to.

  • take advantage of declining market conditions, and
  • purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.

 Borrower Current at time of Short Sale. A borrower is 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, and
  • installment debt payments for the same time period were also made within the month due.

Borrower in Default at time of Short Sale. A borrower in default on his/her mort­gage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Note: A borrower who sold his or her property under FHA's pre-foreclosure sale program is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.

 Exception. A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the

  • default was due to circumstances beyond the borrower's control, such as death of a primary wage earner or long-term uninsured illness, and
  • a review of the credit report indicates a satisfactory credit prior to the circumstances beyond the borrower's control that caused the default.

 

 

 

 

 

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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Suzanne Hinton 07/23/2011 12:20 PM
  2. Lori Cain 07/24/2011 05:29 AM
  3. Renée Burrows 07/24/2011 07:26 AM
  4. Bob Souza (925) 513-3400 & Leilani Souza (916) 408-5500 Souza Realty - Real Estate Broker in Placer County, California 07/24/2011 04:18 PM
  5. Ed Silva 07/25/2011 02:44 AM
  6. Gail Robinson 07/25/2011 03:04 PM
  7. Charles Stallions 02/23/2013 07:05 AM
Topic:
Mortgage / Finance
Location:
Connecticut
Groups:
Realtors®
Mortgages
Real Estate Rookie
Tags:
short sales in connecticut

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Rainer
37,506
Kimberly Brandon
Smart Moves Real Estate - Venice, FL
Broker/Owner

Thanks for putting that info out again - there is so much 'bad' incorrect info out the consumer sometimes just does not know who to believe....

Jul 24, 2011 04:17 AM #31
Rainer
48,952
John Davison
Coldwell Banker - Cary, NC
Raleigh-Cary-Triangle NC

Great information that can help us all and give us the arsenal we need to be armed with when dealing with buyers and sellers!

Jul 24, 2011 04:48 AM #32
Rainmaker
278,044
Malik Crichlow
GoodBuy Homes NJ Essex & Union County Real Estate specialist - Maplewood, NJ
Maplewood,SouthOrange,Union Real estate

Great Post George,

 

I am one Blogger that does not like to paint this rosie picture of a short sale. It is a serious, time consuming and scary process for someone to go through and information like this is very important in the education part of the process.  Thanks for sharing!

Jul 24, 2011 05:18 AM #33
Rainmaker
277,377
Ken Patterson
TPR Properties - Rocklin, CA
Roseville Real Estate, TOP Rocklin Realtor

Hey George,  Nice post with good info.  Give it 5 minutes though.  It will all change.  Again.  Ultimately, a short sale is still preferable to a foreclosure in most circumstances.  I would be hesitant to take odds that an FHA product will still be available in 3 years.  This is something I let all my short sale clients know going in.  The reality is that people short selling today should be planning on having 10-20% down the next time around.  If they can get back in the market for less, great.  But, they should be planning otherwise.  www.TEAMPattersonRealty.com

Ken

Jul 24, 2011 06:41 AM #34
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Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

I see this also and this is a GREAT post!  Short sales are not an end all, be all, sunshine, roses & rainbows solutions.  I shall reblog also!

Jul 24, 2011 07:24 AM #35
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Joan, yes I agree some people have down played the consequences a little to much.


William I guess in stead of bad news this could be good news for some people.


Steve, I have not seen anything good come out of a Short Sales, but if someone has to do it, they should go into it with their eyes open and know the facts.


Vickie, thank you.


Brenda, you are right.  It is not something that you should do if you have an alternative.


Rodney, I have not seen any where they were not late, but that does not mean that there aren't any.  I would think that it would be more likely in the States that property values have taken a big hit, which is not the case here in Connecticut.


Barb, glad I could be of service.


Bill so you know what I am talking about when I referred to those blogs.  Those blogs remind me of the Subprime Lenders did, only now it is the Realtors doing it.


David, you are right.  The guidelines have been changing quickly, what is true today may not be tomorrow.


Cameron, I have run into some potential Borrowers that have gone through a Short Sale and are surprised when I tell them that they still have to wait another year or two before they can do anything.  Someone did not give them all the information when they advised them to do a Short Sale.

Jul 24, 2011 10:05 AM #36
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Sonja, some thing they can and do try.  You would think that they would want to regroup after a bad experience.

Kevin, the weeds are still here but now they are re-surfacing on the Realtor side.

Dave, I am not sure that it is FHA that wants them to go late, I think that is more of a requirement on the Lender side, but I could be wrong.

Lynda, I am not sure, but I would think it would show up on the Credit Report, unfortunately some times things are reported with a code, and unless you no what code to look for you will miss it.  For foreclosures it usually shows up as a code 08 on my Credit Reports.

Ed the banks do have their own overlays some times, but they all have to follow the minimum FHA Guidelines if it is a FHA Loan.  Also it use to be that you could get a mortgage quicker if it was a Short Sale versus a foreclosure, but these days they are be treated almost the same.

Barbara, that is the point that I was trying to make in this blog.  Is it possible for someone to not be late, yes, but is it likely, I would agree with you as say no.

Beth glad I could help.

Christine the only two exception, beside not being late on the mortgage and other debts, that I know of are the two that are listed at the end of the FHA Guidelines in the blog.
"Exception. A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the

  • default was due to circumstances beyond the borrower's control, such as death of a primary wage earner or long-term uninsured illness, and
  • a review of the credit report indicates a satisfactory credit prior to the circumstances beyond the borrower's control that caused the default."

Rosalie, I believe that it was two, but it has been changed to three.

Frank you are welcome.

Jul 24, 2011 10:26 AM #37
Rainmaker
592,321
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

George,

Just knowing the rules is liberating!

When you're ignorant ether form sloth or fluctuating bureaucratic rules you're totaly limited.

When you know the rules every thing that is not prohibited is potentially possible!

So many insist on driving down the center only because they don't know where the edge is.

Never let other's limits, limit you!  I can assure you if I participate I'll ether know the rules* or have help that does and I'll use every thing between the edges.

Bill

* Spelling rules completely escape my understanding.  8>(

Jul 24, 2011 10:36 AM #38
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

David, you are right a Lender can report it differently, but I have not seen them do that.  Even in the case of a Borrower who avoided foreclosure, they will report them the same as if they had been foreclosed on.

Cheryl thank you.

Gita hope it comes in handy in the future.

Janice. you are right painting one picture and then having the homeowner find out something different later is never good.

Bryant, I would expect that do to the market conditions down there in Florida that having to do a Short Sale and being current is more likely than up here.  I know it can happen, but I just have not seen it, in fact one of the reasons for this blog is because I was talking to someone in this situation yesterday.  He had been given wrong information when he did a Short Sales less than a year ago, and was not happy when I told him that he would have to wait because he was late prior to the Short Sale.

Elizabeth yes bank can be more conservative than the FHA Guidelines but they can't be more liberal, and most of them are choosing the more conservative route.

Keith glad this was helpful.

Lorraine or Loretta yes they sure do.

Melissa the FHA rules are the same for everyone, so I would be cautious.

Michael you are welcome.

Jul 24, 2011 10:40 AM #39
Rainmaker
1,247,111
Nick T Pappas
Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, Huntsville AL - Huntsville, AL
Madison & Huntsville Alabama Real Estate Resource

George, congrats on the FEATURE...well deserved.  I've also read a few "rosie" posts about short sales, but those seemed to be about finding an agent who was well versed with the process so that it didn't take forever.  I don't think I would agree with anyone who would paint a "rosie" picture of a S.S.

Jul 24, 2011 01:11 PM #40
Rainmaker
111,522
Jerry Morse
The Morse Company - Janesville, WI
BBA,GRI

Good post!  I never let a short sale seller believe it will be easy to finance their next purchase.

Jul 24, 2011 01:40 PM #41
Rainer
31,955
Gail Nyman
Re/Max United Real Estate - Dunkirk, MD
Every House Has A Story
George, thank you for being so specific in your post. Most agents and owners only hear what they want to hear when the topic is discussed.
Jul 24, 2011 01:53 PM #42
Rainmaker
985,425
Bob Souza (925) 513-3400 & Leilani Souza (916) 408-5500 Souza Realty - Real Estate Broker in Placer County, California
Souza Realty - Roseville, Rocklin, Granite Bay, Loomis, Penryn, Newcastle, Lincoln, Auburn, Meadow Vista (Placer Coun... - Roseville, CA
Homes & Land, Real Estate Investments and Rentals

George, thanks for posting this very helpful info for short sale sellers who may want an FHA loan at a later date. I just re-blogged this post. :)

Leilani

Jul 24, 2011 04:48 PM #43
Rainmaker
255,241
Susan Jackson
America's Network Realty Group, Inc - Sandy Springs, GA

Thanks for posting this information.  Good information to retain as a reference.

 

Jul 25, 2011 03:13 AM #44
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Kimberly, that is why I wanted to just state the FHA Guideline in the post so that they could read it for themselves and come to their own conclusion.

John, thank you and hope you can put it to good use.

Malik you are welcome

Ken, I agree that the rule could change again at any time, but hope that you are wrong about FHA not being around in another 3 years.  The conventional loan product guidelines on Short Sales are much tougher and could require someone who has gone through a Short Sale to wait as much as 7 years.

Renee, you and I have been around long enough to realize that, but there are some blogger on here that fail to see the bigger picture.  And thank you for the re-blog.

Bill, I agree.  Give me the rules and let me decide what I can or can not do for myself :)

Jul 25, 2011 04:10 AM #45
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Nick, good for you. Doing a loan after a Short Sale is not a piece of cake, in fact even if they have not gone late on their payments it is not a guarantee that a Lender will do a loan even if FHA allows it.

Jerry that is the honest thing to do and it prepares them for what could possible follow.

Gail that does seem to be a problem with many things in life.

Leilani, glad that you found the blog useful and thank you for the re-blog.

Susan I hope that it is useful for you in the future.

Jul 25, 2011 09:28 AM #46
Rainmaker
630,146
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

Hi George, It's good to know these guidelines going forward but unfortuate for the ones who while doing shot sales could not get the bank to even look at approval because they were current on their payments.  Great post!  Thanks for sharing!

Jul 26, 2011 04:41 PM #47
Rainer
124,066
Jeff Coon
Annie Mac Home Mortgage - Toms River, NJ
Branch Manager

I have successfully closed 18-20 deals for clients who sold their home in a short sale & immediately purchased another home with our company.  The key is the client cannot have been late on their old mortgage. Yes, I know that these people are told often that they 'cannot' do a short sale unless they fall behind, but this is not always the case.  You need to be persistent, have a genuine hardship, and documentation, but it can be done.  One of my senior underwriters put it this way to me when I asked about this: " If their lender agrees to take a lower amount to satisfy their loan, then that's up to them. As long as they have paid on time to that point, that's what we are concerned with"

Credit does take a hit, but not as bad as foreclosure.

You should also be aware of the fact that in certain cases, delinquencies are 'excusable' if the reason is considered a 'one time  event' like serious illness, divorce, death, etc. I am working on a deal with one of my pre-approved buyers right now where they had a foreclosure one year ago, and I am getting him a new FHA loan. They can document his injury while on the job, the ensuing mendical bills, and loss of income.

Don't give up, keep asking HOW CAN IT BE DONE.  A good lending partner who knows their business can help.

Jul 27, 2011 04:13 AM #48
Rainer
5,124
Marc Seligman
Citibank - Harrison, NY

Interesting because, the way I read the FHA guideline is that they can do a mortgage for a borrower coming from a previous short sale right away if there is an extenuating circumstance. It requires a manual underwrite however. 

As a loan officer that likes to use every avenue to get loans approved, I will have to discuss that with our FHA underwriters.

 

Nov 14, 2012 04:35 AM #49
Rainmaker
1,959,728
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.

I did not know this, thanks for the informative post and helpful information I am passing it along as well.

Feb 23, 2013 06:44 AM #50
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