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FHA loan rules for new loans following a short sale may seem complex--the rules that apply to you often depend on the status of your mortgage loan prior to the short sale. But, when is a new FHA home loan possible following a short sale?

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Rules for FHA Loans Following a Short Sale

Rules for FHA Loans Following a Short Sale
September 9, 2017 - Borrowers who have experienced financial trouble and wind up selling their property in a short sale arrangement often recover from their difficulties and feel ready to become homeowners once more. When you are ready to fill out an FHA loan application in the wake of a short sale, what do the FHA loan rules say about having such a transaction on your record?

FHA loan rules for new loans following a short sale may seem complex--the rules that apply to you often depend on the status of your mortgage loan prior to the short sale. We have written about these rules in the past, but since the publication of the FHA Single Family Loan program handbook, HUD 4000.1, there have been many changes and updates to portions of FHA home loan policy.

FHA has a list of short sale (also known as a “pre-foreclosure sale) rules and regulations in HUD 4000.1 for borrowers looking to become homeowners once more. These rules begin with the FHA defining what it considers to be a “short sale”:

“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.”

When is a new FHA home loan possible following a short sale? According to HUD 4000.1:

“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.”

There may be exceptions to this rule, depending on a borrower’s circumstances. One such circumstance? When a borrower was current on the mortgage and not delinquent at the time of the short sale.

“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.”
HUD 4000.1 adds, “The Mortgagee may grant an exception to the three-year requirement if the Short Sale was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the Short Sale.”

HUD 4000.1 states that divorce is generally not considered as an extenuating circumstance, but exceptions to that policy may be granted on a case-by-case basis if the mortgage was current at the time of the short sale, the ex-spouse received the property, and there was a short sale which followed. Speak to a participating lender to see if/how these rules might apply to your situation.

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