A couple of days ago one of my favorite loan officers shared some information about a problem facing many would-be buyers who are trying to get approved for an FHA mortgage after a short sale. Here’s a couple of surprising things I learned that could squelch some dreams.
Most of us probably know that FHA requires a 3 year wait from the date of the short sale, (conventional 4 years), but here is the kicker: Did you know that for DU underwriting it is actually 3 years from the reported date? That means that if the 1st or 2nd lien holder didn’t report the account as closed until 10 months after the close of escrow, a buyer would not qualify until 3 years and 10 months after closing!
And it’s not just short sales. FHA looks at a short sale, deed-in-lieu, foreclosure, and loan modification, (YES, even a loan mod) as the same derogatory event, and as noted above they require a 3 year wait from the reported date. Approval for an FHA loan is normally based on running the application through the Desktop Underwriter (DU) automated underwriting program. The DU program reads the dates entered on the credit report so if that is incorrectly reported, the loan will be denied. In the case of a short sale, it might be helpful to find a lender who agrees to manually underwrite the loan so that the correct dates are used.
Besides the date, the other item that could trip up a buyer is how the old mortgage debt is reported. If the account is reported as closed, but still shows the amount not paid off in the short sale as a balance on the account, the reported balance will probably disqualify them in DU by calculating a payment and inaccurately increasing their debt-to-income ratio.
Advice from my loan officer: Following a short sale, borrowers should check their credit report from all 3 reporting agencies about 6-8 weeks after closing. If the sale is not reported, and/or it does not show a zero balance they should contact their previous lender to get it corrected. Then, get a DU or manual underwriting approval well before shopping for a home. It may mean the difference between buying again in 3 years versus facing an unanticipated and disappointing wait!
Inside San Diego Short Sales 
March 10, 2012 at 1:06 pm
When trying to decide whether a short sale is right for you don’t be fooled into making the decision under false hopes that your credit will not be impacted all that much. The biggest advantage in a short sale is the shortened time frame in which you will be able to purchase a home in the future. Jus a tip from Homes in Ladera Ranch
March 17, 2013 at 9:01 am
I am going through the manual underwriting problem in Maryland after a short sale in October 2010. I corrected some information on the credit report on the second from the short sale and now the last date of a reported update is 2/28/2013. Meanwhile, in the text body it says the loan was closed on October 2010. Why in the world does the 3 in 1 credit report show an update date rather than a loan close date?
March 19, 2013 at 6:52 am
I’m no tsure Ernie but the most important piece of evidence you need for underwriting is a copy of the certified HUD (closing statement). I’m actually surprised that you are able to buy again as it has been less than 3 years since your short sale closed. Good luck!