Department of Housing and Urban Development (HUD) just released FHA loan guidelines for prospective borrowers who have experienced a short sale. HUD sent a memo to all FHA lenders and underwriters explaining how to handle an FHA loan applicant with a short sale on their record. (Download the memo HERE). This is great news for hundreds of thousands of Americans who got rid of a previous home through a short sale and are interested in purchasing a home in the near future.
One of the biggest myths in the real estate world right now is that a foreclosure is just about the same as a short sale. I’ve heard appraisers, agents, even mortgage brokers echo this sentiment. Nothing could be further from the truth. There are tremendous benefits for a homeowner to do a short sale over letting a property go to foreclosure. These new guidelines are yet another reason why a short sale is far more advantageous to a borrower than simply letting the property go to foreclosure.
The new guidelines are specific for FHA loans only. Here is a brief summary:
1. If the borrower remained current on payments throughout the short sale process, they are eligible for an FHA-insured mortgage.
2. If the borrower fell behind on payments during the short sale process, they are eligible for an FHA-insured mortgage after 3 years.
Obviously, this will encompass the majority of those who have experienced a short sale. Although 3 years may sound like a long time, with a foreclosure, a borrower is unable to get a mortgage for 7 years. These HUD guidelines shave 4 years off the normal time period.
There are two very important caveats to consider:
1. Reason For Short Sale: Although highly subjective, this condition is aimed at not rewarding those borrowers who either did a short sale simply to take advantage of the declining market or purchased a new home and then did a short sale on their old property.
2. Short Fall: If the borrower was held responsible for the loss from the short sale, that amount must be calculated in the Debt to Income (DTI) ratio.
In summary, these guidelines provide a glimmer of hope for so many Americans who want to purchase a new home after having gone through a short sale.