There are a lot of schools of thought but just last week, FHA finally laid out it’s decision on how they will determine if a homeowner is eligible for FHA financing after a short sale.  As I have said before, there are probably 10% of lenders that will do this, the other 90% will not.  Keep you eyes open as the lending industry is about to get more strict.  My guess is that the 10% will likely cease to exist.

You should be careful to imply that this is somehow set in stone.  There are way too many variables to risk ourselves in implying that our client “IS” going to get into a home in 2-3 years.

This mortgagee letter 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).

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:

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

Borrowers are considered eligible for a new FHA-insured mortgage if

• they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, &
• the proceeds from the short sale serve as payment in full.

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.

However, I want to make a very important point.  As much as this may sound exciting, please be careful what you say or read. 

This is what you need to consider:

• The fact is, lenders are known to impose layers of restrictions on top of current guidelines.  Just because FHA says so doesn’t mean the lender will lend the money.  In fact many lenders will not.
• How many people do you know who’s credit is actually in good shape before or during a short sale?  See what I mean?

On conventioanl financing the rule is generally 2 years after a short sale,  however:

• there are probably 10% of lenders that are doing it.  The other 90% will not.
• It may also vary upon whether it is a Short Sale with no default in payment history
• or, whether it is a pre-foreclosure that will likely reflect on the credit history
• It will also depend whether the payoff at the time of settlement reflects the deficiency or it does not.
• If there are no lates prior to the short sale and the agreed upon payoff does not reflect the deficiency thus not reflecting on the HUD, then it is likely a good possibility that the client can get the loan in a period of 2 years. If there are lates in the history, then it becomes pretty clear it is a pre-foreclosure and they are very unlikely to get the loan (Must wait for 3-4 years or until the credit permits).

By Ted Canto, Sr. Mortgage Consultant , Academy Mortgage