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FHA Loan Rules: New Home Loans Following A Short Sale

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We get many questions about FHA home loans following bankruptcy, foreclosures, or short sales. The FHA loan rules for new loans following a short sale can be a bit complicated as much depends on the status of the original loan prior to the short sale. What does the FHA say about getting a new loan in the wake of such a transaction?

The FHA addresses short sale issues in Chapter Four of HUD 4155.1. Section C states,

“A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/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.”

For borrowers who were current on their mortgages at the time the short sale was carried out, FHA loan rules say he or she “is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all

• mortgage payments 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.”

For short sales where the borrower was delinquent on the original loan, the rules are different. “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.”

FHA rules also add the following;  “A borrower who sold his/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 primary wage earner or long-term uninsured illness, and

• a review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.”

For more information on this issue, contact the FHA for assistance by calling 1-800 CALL FHA.

Do you have questions about FHA loans or refinance loans? Ask us in the comments section.

2 Responses to FHA Loan Rules: New Home Loans Following A Short Sale

  1. Charles Toney says:

    I became permanently disabled and could no longer work. I filed a chapter 7 bankruptcy on my 1st and 2nd mortgages and credit card debt and was discharged on August 9, 2011. I had perfect credit prior to my becoming disabled. A Realtor contacted me regarding a short sale and he was approved with my bank BofA. He had a buyer, so I did the short sale even though I was no longer liable for the debt. I am renting with the option to buy and I am receiving Social Security Income and Met Life Disability income. I have no debt other than rent and I have reestablished credit. I have a 710-690-688 credit scores. My debt to income ratios are good and have money for down payment and closing cost, plus a rent credit of $4150.00 as of February.I was declined by two lenders due to my past credit history prior to bankruptcy. What are your thoughts regarding this. Thank you

    • Joe Wallace says:

      The credit history issue is an important one–it’s the lender’s call whether to approve or deny a loan based on prior credit history as long as the credit standards are applied the same for all applicants. The best thing to do in cases where credit history stands in the way of credit approval is to call the FHA directly and ask for a referral to an FHA approved housing counselor who can advise steps on how to improve credit scores and other issues. Contact them at 1-800 CALL FHA.

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