FHA


Great news for homeowners who experienced a short sale and are ready to buy again! HUD announced yesterday that they will reduce the wait period to qualify for an FHA backed mortgage to 1 year! Previously, the wait time to qualify for an FHA backed mortgage was 2 years following a bankruptcy and 3 years following a foreclosure or short sale. According to FHA Commissioner Carol Galante, “FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

This of course does not mean that everyone will qualify. Borrowers must prove that they experienced an “economic event” where their household income fell by at least 20% for 6 months or longer. They must also document that they have fully recovered financially, and agree to take a housing counseling course prior to close of escrow.

This is very encouraging news for those of us who have helped clients through a short sale, as many have recovered and are ready to buy again while housing prices and interest rates are still relatively low. Reducing the wait time should also encourage overall housing market recovery as more people will be eligible for FHA financing. Likewise, this is good news if you are currently facing a short sale as you will now be able to buy again much more quickly.

If you have any questions about FHA reducing the wait time to borrow after a short sale, or short sales in general, please don’t hesitate to give me a call.

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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!