Updated FHA Guidelines for "Short Sale" and "Short Pay Off" Loans

We have heard about short sales and short pay offs,

but what are they and how can they affect borrower eligibility?

In response to the 09-52 letter released by HUD last week, here is how I would explain to clients and/or real estate agents about the impact of short sales and short pay offs on borrowers:

Short Sale: a previously owned property sold for less than what was owed

Short Pay Off: when there is a principal write down of indebtedness that cannot be refinanced into a new mortgage


SHORT SALES
Borrower s are eligible for an FHA mortgage 12 months from the date of the pre-foreclosure sale (if mortgage was current at the time of the short sale).

Borrowers are eligible for an FHA mortgage 3 years from the date of the pre-foreclosure sale (if mortgage was in default at the time of the short sale).

Borrowers are not eligible for a new FHA mortgage if:
1. they short sale their home to take advantage of the declining market condition, or
2. they purchased a new home at a reduced price within a reasonable commuting distance from the property they short sale.

Lenders may make exceptions if:
1. the mortgage in default was due to circumstances beyond the borrowers control (such as death of primary wage earner, long-term illness, etc.), or
2. the review of the credit report indicated satisfactory credit prior to the circumstance beyond the borrowers control that caused the default.

SHORT PAY OFFS
Borrowers must be current on their mortgage in order to be eligible for refinancing with a short pay off.

FHA will insure the first mortgage (where the existing mortgage holder write off the amount of indebtedness that cannot be refinanced into a new FHA-insured mortgage) if:
1. the amount short that is written off is due to the home not having enough value based on a current appraisal, and/or
2. borrowers have experienced a reduction in income and do not have the capacity to repay the existing loan.

If the existing mortgage holder does not agree to write off the indebtedness, they may execute a second mortgage for the difference. In this case, borrowers must qualify within FHA income ratios for the program since the second mortgage will be added to the total. *This policy applies to no cash-out refinances with short pay offs.


*Please keep in mind that guidelines are subject to change without notice.
Update from HUD provided 12-16-2009.
Information obtained from the Mortgagee Letter 09-52.