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.
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