What are the guidelines for borrowers with a short sale on a previous principal residence?

A Borrower is generally not eligible for a new FHA-insured mortgage if they relinquished a property through a short sale within three years from the date of case number assignment.

The lender must document the passage of three years since the date of the short sale. If the short sale occurred within three years of the case number assignment date, the mortgage must be downgraded to a Refer and manually underwritten.  This three-year period begins on the date of transfer of title by short sale.

If the credit report does not verify the date of the transfer of title by short sale, the lender must obtain the short sale documents.

Exception for Borrower Current at Time of Short Sale

A Borrower is considered eligible for a new FHA-insured mortgage if, from the date of case number assignment 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.

Exception for Extenuating Circumstances

The lender may grant an exception to the three-year requirement if the short sale was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the short sale.

Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a Borrower’s mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the property, and there was a subsequent short sale.

The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

If the short sale was the result of a circumstance beyond the Borrower’s control, the mortgagee must obtain an explanation of the circumstance and document that the circumstance was beyond the Borrower’s control.

For additional information see Handbook 4000.1 II.A.4.a.v; II.A.4.b.iii.(G);  II.A.5.a.iii.(J) available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh