August 30, 2013
We get many questions about borrowers who want to apply for an FHA loan in the wake of a short sale. What do FHA loan rules, as described in HUD 4155.1, say about applying for an FHA mortgage after a short sale?
Much depends on whether your previous loan was current or delinquent when the short sale occurred. Borrowers who were current on all mortgage payments at the time of the short sale may find a lender willing to work with them based on HUD 4155.1 Chapter Four Section C, which states:
“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.”
Note that the FHA loan requirement as stated in Chapter Four, Section C also addresses the borrower’s OTHER debt, not just the mortgage payment. That is a very important factor to consider.
Another important factor is the recent Back To Work program implemented by the FHA which may also provide some added leniency if borrowers can document financial difficulties related to the recession. So while Chapter Four Section C does seem to have the “final word” on FHA loan eligibility in these cases, don’t assume you cannot get an FHA mortgage–the new Back To Work standards may be of some help for qualified borrowers.
Borrowers who were in loan default at the time of their short sale may also benefit from the Back To Work program if their personal circumstances qualify. However, in general FHA rules in Chapter Four, Section C state:
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/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.
Exception: 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.”
For more information on these rules or the FHA Back To Work program, contact a loan officer or the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA home 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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