The calls are coming in from former short sale homeowners that now want to reenter the housing market. The rumor that FHA will finance homes immediately after a short sale is as likely as Lindsay Lohan staying out of jail. FHA Mortgagee Letter 09-52, is very specific on their guidelines. (I know, it shocked me too… a government mandate that is clear and concise).
1. To finance a home with FHA the borrower must have been current on their mortgage at the time of the short sale.
2. All mortgage and installment debt payments(such as autos) made on time within the prior 12 month period.
3. You may want read a little Shakespeare too because a letter of explanation will be required to document the ‘great’ reason for the short sale. “I dumped my house so I could buy the identical floor plan with a pool for $200,000 less across the street from my former home,” is not acceptable.
4. Borrowers who were in default on their mortgage at the time of the short sale are not eligible for three years from the date of the trustee sale. This is also true for the sneaky guys that plopped their homes in a bankruptcy. The wait is three years from the trustee’s sale and with reestablished credit.
Extenuating circumstances could shorten the term. Examples: relocation for employment (moving from Mesa to Goodyear is not acceptable), a major change in family dynamics such as a death or severe illness. Documentation will be required. Divorce may or may not count.
Conventional Loans also have their guidelines for borrowers with previous short sales (also known as pre-foreclosures) per their announcement SEL 2010-5:
1. If there were no lates prior to the short sale the waiting time is 2 years WITH 20% Down,
2. A down payment of less than 20%, still with no lates, the wait is 4 years
3. If the house payments were past due the minimum penalty is 4 years depending on your credit scores, credit history and underwriting discretion.
Extenuating circumstances shorten the time-out to two years, with a minimum down payment of 10%.
Keep in mind many lenders have their very own overlays. The most common is not considering any application until three years has passed from the date of the short sale.
It is recommended that an underwriter bless the file by providing a written approval, before beginning the home search. Be prepared: The last file we closed with a recent short sale was almost two feet high in paperwork.
The lender mantra: If you say it, you document it.