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Had a short-sale? Understand FHA rules on buying a new home

By
Mortgage and Lending with Cambria Mortgage, The Joe Metzler Team NMLS 274132

The FHA mortgagee letter described below provides guidance to lenders and underwriters regarding borrower eligibility when a previously owned property was sold for less than what was owed (short sale), or there is principal write down of indebtedness that cannot be refinanced into a new mortgage (short pay off)...

FHA and Short Sales - Mortgagee Letter 09-52

Summary - FHA Guidance on Short Sales Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to
  1. • take advantage of declining market conditions, and
  2. • purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.

Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g
Summary - Guidance on Borrowers current at the time of Short Sale Borrowers are considered eligible for a new FHA-insured mortgage if
  1. • they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
  2. • the proceeds from the short sale serve as payment in full.

Reference: For detailed information, see "Short Sales" at 4155.1 4.C.2.l.
Summary - Guidance on 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. Lenders may make exceptions to this rule under certain circumstances.

Reference: For detailed information, see "Short Sales", at 4155.1 4.C.2.l.
Summary - Refinancing with Short Pay Off FHA will insure the first mortgage where the existing note holder(s) write off the amount of indebtedness that cannot be refinanced into the new mortgage due to a decline in property value and/or a reduction in income.

Reference: For detailed information, see "Short Pay Offs", at 4155.1 3.B.1.f.

 

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Comments (7)
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Jim Startzman
Long and Foster Real Estate - Wilmington, DE

Great information.  Thanks for the easy to follow chart.  Keep up the posts!

Feb 04, 2010 08:35 AM
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

Nice chart.  I think it is surprising to see a seller who has defaulted on a home loan be eligible for a new FHA loan in three years.  It used to be any type of default or bankruptcy could tie you up for at least 5 years.

Feb 04, 2010 08:38 AM
Cari Anderson
Danville, CA

Joe - Thanks for posting this.  As the housing market recovers more and more folks will be eligible to re-enter the housing market under this guideline.  ~Doug

Feb 04, 2010 08:39 AM
Guy Thomas
WR Starkey Mortgage - Colorado Springs, CO

Good information for everyone to be aware of. These situations are beginning to crop up with more frequency now, and Realtors need to have the info to better advise clients of their choices.

Feb 04, 2010 08:41 AM
Elva Branson-Lee
Solid Source Realty GA - Atlanta, GA
CDPE - Atlanta Real Estate & Short Sale Agent

The problem I see is that lenders, for the most part, are not willing to consider the short sale request UNTIL the borrower is in default on payments. I've not yet had a seller who was current be able to get any attention from a lender until they were completely out of options and stopped making mortgage payments.

Feb 04, 2010 08:48 AM
Anonymous
Sue

Hi, nice blog.  I have a question, as someone above posted.  I do not understand the "must be current on payments, not in default" to qualify for a new FHA loan.  In order to qualify for our short-sale, we had to be late/in default.  So that makes no sense.  However, we had no choice as my husband lost his job and I could not carry the loan myself.  We are now moving to another state wherein he has more job opportunity, and even if he never worked again, my salary would allow us security as the homes are much cheaper and I could carry it on my own.  So, I believe we would fall in the "exceptions/circumstances" of this rule.  Until our short sale, we were never late on a payment in 9 years.  Any input would be appreciated.  Thanks.

Oct 28, 2010 06:51 AM
#6
Anonymous
Janet

We had to do a short sale as the market vaue on our home had declined.  We had tried on four different occasions to sell it befor entering into the short sale.  We were not late on payments.  My husband got a new job out of state and will be traveling alot so i elected to stay in the area where I had a good job.  We could not afford to pay the mortgage on the house and a rental for him at the new location.  My husband is a veteran, we have good credit and wanted to down size to a smaller home in order to be able to have a mortgage payment that was affordable and allowed us to pay for housing in both locations.  Afterwards, we were informed by the bank(s) that we could not buy another home for 2 years because of the short sale.  We did not foreclose, we kept payment current and now we can not buy something else.  It just makes no sense to me that we are penalized by the very banks that we the taxpayers have bailed out.

Jun 06, 2011 09:53 AM
#7
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