November 12, 2013
Mortgage loan rules can change over time for a variety of reasons. Borrowers who researched their loan options a year or more ago may be surprised to learn that the rules that applied at the time they explored their options may have changed due to regulatory requirements, financial institution policies, or FHA program rule updates.
With that in mind, here is the current FHA guidance regarding a borrower’s options for applying for a new FHA mortgage loan following a short sale. FHA loan rules published in HUD 4155.1 state that while having a short sale on your financial record is not grounds in itself for disqualifying a borrower, certain requirements and restrictions may apply.
“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.”
This is the opening information found in Chapter Four Section C of HUD 4155.1, which addresses several different circumstances including new FHA loan applications for borrowers current on the loan at the time of the short sale, and borrowers who were not.
Borrower Current at the time of Short Sale
According to the FHA Loan rulebook, “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 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 the time of Short Sale
HUD 4155.1 Chapter Four Section C states, “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/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 these policies, speak to a loan officer or contact the FHA directly.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: