March 20, 2014
One of the most commonly asked questions we get in our comments section has to do with whether a borrower can apply for a new FHA loan following a short sale. The loan rules for post-short sale transactions are found in HUD 4155.1, Chapter Four, Section C under the heading, “Short Sales”.
It starts off by stating that while it IS possible to get a new FHA loan following a short sale under the right conditions, “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.”
The rules mention an FHA loan is possible, post-short sale, if the right conditions are present. What are those conditions? From Chapter Four:
“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.”
What about situations where the borrower was in default on the mortgage when the short sale occurred? “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.” FHA loan rules also add the following 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.”
Since FHA loans are handled on an individual basis, some borrowers MIGHT be eligible for an exception according to Chapter Four. “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.” This exception is at the lender’s discretion and may not be available to all borrowers.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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: