July 9, 2015
There are many circumstances that can lead to bankruptcy and/or a short sale of the home. We get many reader questions about these scenarios. One recent question involves a married couple who were discharged bankruptcy three years ago, but are currently facing a short sale of their home. Does the couple qualify for a new FHA mortgage loan under such circumstances?
There are many factors that could determine whether a lender is able to work with a borrower on a new FHA mortgage or not. One obvious one is credit rating and credit activity since the bankruptcy. Borrowers who have built up good credit since the discharge of the bankruptcy may find a lender willing to work with them–establishing reliable credit history after a “negative economic event” is one of the most important things the borrower can do.
But that’s not all–at least not in this particular case.
The reader indicated that a short sale is pending, and FHA loan rules may require the borrower to wait out a “seasoning period” following the short sale unless the mortgage was current at the time of the short sale. The proceeds from the short sale must “serve as payments in full” according to FHA loan rules.
A short sale is not necessarily a barrier to a new FHA loan–but the payments cannot be delinquent at the time of the short sale. That is very important for any borrower hoping to get a new loan soon after a short sale. FHA loan rules state:
“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.” Borrowers would need to discuss the possibility of an exception with the lender directly.
Another aspect that a lender will consider is the cause of the short sale. Let’s examine FHA loan rules in this regard, as printed in the FHA/HUD mortgagee letter 09-52:
“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.”
As you can see from the rules cited above, getting a new home after foreclosure and/or a short sale is not impossible, but it does require some careful planning. Don’t assume you cannot get a new home loan in the wake of negative economic events, but do assume that you will need to take a close look at your credit and rebuild your credit history.
Do you have questions about FHA 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.
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