Hands down, some of the most-asked questions we get in our comments section involve the FHA loan rules for borrowers who have a short sale or foreclosure on their credit record. It’s easy to assume that a new home loan isn’t possible after a short sale or foreclosure, but is this true?
There are several factors that can determine whether a borrower is able to get a new loan or not under such circumstances, and it’s very important to remember that your credit activity, state law, lender standards, and your FICO scores will all play a role in whether a new loan can be approved or not.
FHA loan rules often set benchmarks in this area but don’t have the final word when state law or lender standards also come into play.
For borrowers who have a short sale on their credit record, FHA loan rules in HUD 4000.1 state:
“The Mortgagee must document the passage of three years since the date of the Short Sale. If the Short Sale occurred within three years of the case number assignment date, the Mortgage must be downgraded to a Refer and manually underwritten. This three-year period begins on the date of transfer of title by Short Sale.” In general, a borrower is NOT eligible for a new FHA loan if fewer than three years have passed at application time, but there are exceptions:
“A Borrower is considered eligible for a new FHA-insured Mortgage if, from the date of case number assignment 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.”
There are also exceptions for borrowers who experienced a short sale as a result of extenuating circumstances beyond the borrower’s control. Divorce, and the inability to sell or transfer the home due to relocation or related issues would not, according to HUD 4000.1, qualify in this instance.
The rule book also states that documentation is required for the date of the short sale, and for any exception to the “three year rule” would require a written explanation from the borrower.
“If the credit report does not indicate the date of the Short Sale, the Mortgagee must obtain the Settlement Statement, deed or other legal documents evidencing the date of property transfer. If the Short Sale was the result of a circumstance beyond the Borrowers control, the Mortgagee must obtain an explanation of the circumstance and document that the circumstance was beyond the Borrowers control.”
We will examine similar requirements and rules for borrowers apply for FHA loans after a foreclosure and related issues in an upcoming blog post. The FHA requirements are similar in such cases, but not quite the same, as we’ll review.