The answer to this question varies depending on the loan program a buyer is looking at, but most buyers who have past credit problems rely on FHA loans as their fastest track back to homeownership. This is due to FHA’s lenient credit guidelines compared to conventional loan programs.
HUD (The Department of Housing and Urban Development) just released updated guidelines on the very topic on December 16th, 2009 in their Mortgagee Letter 09-52. This mortgagee letter specifically covers FHA guidelines for buyers who have sold their property for less than what they owed.
The new FHA guidelines say a buyer cannot buy for 3 years if they were delinquent on their previous loan leading up to the short sale. This timeline is identical to FHA guidelines on a foreclosure.
The guidelines do say a homebuyer can buy immediately following a short sale IF they were current on their mortgage and other installment debt payments at the time of their short sale and if the proceeds from the short sale were accepted as a payment in full. In other words, if you were not late and the bank accepted your sale, you can buy again.
HUD does say that you cannot buy using a FHA loan if the purpose of the short sale and new purchase were done to take advantage of declining market conditions or to purchase a similar or superior property at a reduced price. In other words, don’t abuse the guidelines to get a better deal.
To sum up the guidelines, you can buy immediately after a short sale but you cannot have been late on your loan and you can’t buy if your short sale was done to benefit from current market conditions. Which scenarios would this apply to? Here’s a few that would fit the requirements:
- You are forced to move do to a new job and location. You have to sell your home and you owe more than it’s worth.
- You cannot afford to keep your home, such as losing your job, and were able to sell your home before becoming late on the home loan payments. You then buy again when you have a new job and can afford the payments
- You have a balloon payment due and cannot afford the payment. You sell for less than what you owe due to market conditions and later buy.
I re-posted your article. Thanks Keane for being on top of the pertinent information we need to be successful!
Thanks Nancy!
The question is whether any banks are allowing you to get into a short sale without being delinquent? Everyone we’ve talked to who has tried this has been told (by different lenders) that they will not be eligible for a short sale until they are delinquent in their payments. Seems like a catch-22 if that’s the case.
David,
You’re absolutely right. It is a catch 22.
The key is to show a level of hardship. The lenders assume they shouldn’t allow a lower amount until they know you’re serious.
The only times I hear it works is when you can show the hardship prior to late payments. Divorce is a common one. It’s clear they need to sell the house and nobody wants it, with only one income.
You’re right though, it’s rare. For those rare moments, it is nice there’s an option.
David is correct. It’s definitely a Catch 22. I was getting my second mortgage payments debited automatically from my bank account thoughout the life of my loan (and of course never missed a payment). During the short sale (SS) process, my lender did not take out my scheduled payment in order for the SS to get approved. So now I have a thirty day late on my record. I settled with my lender after the SS, but that’s not going to allow me purchase a house for three years b/c of one thirty day late.
Does anyone know of a lender in Colorado or one that does loans for Colorado buyers that will do an FHA loan for a borrower that has done a short sale due to a divorce and wasn’t late on her payments?
Debbie,
Based on your circumstances, you qualify. You shouldn’t have a hard time finding a lender. If you do, please let me know and I’ll help find one for you. I would recommend you talk to a direct FHA lender where the loan officer can talk to the underwriter directly before you shop to confirm you’re okay. That’s what I do when I have a scenario that needs some explaining.
Keane
Keane, Thanks for the direction. If I don’t find someone here myself, I’ll definitely recruit your help
Debbie,
No problem
Most of the visitors to my blog aren’t in states I can serve, but this blog is for everybody. Let me know how it goes. Even if I can’t help you, I can hopefully help you find someone.
Keane
Thanks for the information. I had to short sale my home in NC a year ago when my job moved me to Ohio (and I was $50K upside down). Fortunately my mortgage was with a credit union and I did not have to go into default to get the short sale so we were never late on any payments. We are in a 2 yr lease on a house rental in Ohio and I contacted Wells Fargo just to start getting some information on mortgages and such as next June our lease is up and the loan rep said I had to wait 2 years to even apply for a mortgage. I gather from the postings here that may not be true (proceeds from the sale were used as payment in full).
DJM,
Your scenario is ideal for a FHA purchase after these new guidelines were released but you should know that not every FHA lender will follow them. If you seek a FHA lender who does not restrict this, you’ll be able to buy now.
Keane
Hi Keane,
My husband and I were transferred from Ohio and had to short sale our home a year ago.
The problem I am running into is that we were never late on ANYTHING but a month before the SS went thru Citi told me I had to let my last payment go 30 days late or the SS would not go thru. I have an email string were I am basically begging my “Mortgage Counselor” to accept the last payment and she is writing back… “Do not pay your last payment”
So I guess my question is… Will this email help me in any way?
GMM,
The only thing you can do is see if you can dispute that late payment and see if the old lender can provide proof you were late. If they can’t, your dispute to the credit bureaus may get it removed.
Did they not offer a deficiency option where you could carry the debt?
I moved from wiosconsin to Tennesee, owned a home in both states. I had to short sale the home in Wisconsin while owning and livingin my home in Tennesse. I tried to refinance my Tenn home and the underwriter would not allow the refinance. Does the Fannie Mae Guidelines apply to refinancing your current residence?
Steve,
If you were late on your short sale, it would affect your ability to refinance your primary residence. Lenders typically look at the payment history on all mortgages.