We get asked this question just about everyday, so here are the FHA rules.
Short Sales Rules with FHA Financing
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 at a reduced price a similar or superior property within a reasonable commuting distance.
Borrowers Current at the time of Short Sale
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 due 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 withinthe month due.
Borrowers in Default at the time of Short Sale
A borrower in default on his/her mortgage at the time of the short sale (or preforeclosure 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: Lenders may make exceptions to this rule for borrowers in default on their 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
• review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.
• For detailed information on converting existing principal residences into rental properties, see HUD 4155.1 4.E.4.g.
• For information on short payoffs, see HUD 4155.1 3.B.1.f.
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