Can I get an FHA loan after a short sale? Many have asked this question, unsure of the FHA loan rules for transactions in the wake of a negative credit event such as a foreclosure, bankruptcy, or short sale. To begin, we should address the basic definition of a short sale and what that means for a potential FHA borrower.
What Is A Short Sale?
A short sale involves a transaction where a property is sold to avoid foreclosure, often at a loss. It is referred to professionally as a “pre-foreclosure sale”. FHA loan rules in HUD 4000.1 specifically define the short sale transaction as follows:
“Pre-Foreclosure Sales, also known as Short Sales, refer to the sales of real estate that generate proceeds that are less than the amount owed on the Property and the lien holders agree to release their liens and forgive the deficiency balance on the real estate.”
Borrowers who have sold their property as described above would be considered by a participating FHA lender to have participated in a short sale.
Can I Get An FHA Loan After A Short Sale?
FHA loan rules in HUD 4000.1 require the lender to ensure certain conditions are met for borrowers who want to apply for an FHA mortgage in the wake of a short sale. One of those conditions is a mandatory waiting period.
“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.”
Manual underwriting means that the lender may require more documentation in order to insure FHA loan requirements are met. A borrower should know that credit activity, overall patterns of credit reliability, and debt ratios will be carefully scrutinized in such cases.
When Does The Three-Year Waiting Period Begin?
FHA loan rules state that the three year waiting period starts on and not before the date of “transfer of title by Short Sale”. In general, borrower should expect to wait out the entire three years unless they meet certain requirements for an exception (see below).
Are There Exceptions To The Three Year Waiting Period?
FHA loan rules do provide certain exceptions for the mandatory three year waiting period for a new FHA loan following a short sale. Those exceptions are as follows as listed in HUD 4000.1:
“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;
-installment debt payments for the same time period were also made within the month due.”
Additionally, there may also be exceptions for circumstances that are documented as being beyond the borrower’s control such as illness or the death of a wage earner.
Borrowers should know that additional lender standards beyond these FHA loan rules may apply. You will need to discuss your circumstances with a lender to know what rules may apply at that financial institution.