Understanding the new short sale rules

As we enter a new year, there are lots of new rules in real estate that take affect.
There is much general misunderstanding of the impact of a short sale on one’s ability to get a new mortgage and how soon that can occur. From the Blog - http://timandjulieharris.com/ comes the following explaination of the recently released FHA rules on that topic.

The Department of Housing and Urban Development (HUD) released a letter to lenders regarding borrower eligibility for a new Federal Housing Administration (FHA) mortgage after pursuing a short sale.

Download the new guidelines (available to download here)

Here is the actual language from the new FHA Guidelines:
FHA Guidance on Short Sales Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.
Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g

Here is the exception:
Guidance on Borrowers current at the time of Short Sale Borrowers are considered eligible for a new FHA-insured mortgage if they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and the proceeds from the short sale serve as payment in full.
Reference: For detailed information, see “Short Sales” at 4155.1 4.C.2.l.
Translation: I had to read that a few times…here is the translation. If the homeowner/ borrower didn’t miss any payments prior to doing the short sale AND their overall credit history will allow…they CAN buy immediately following a short sale using FHA financing. The focus seems to be on rewarding those who made their payments on time..and did a short sale VS. those who missed payments prior to a short sale.

More info:
Guidance on Borrowers in default at the time of Short Sale Borrowers in default on their mortgage at the time of the short sale (or pre- foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances.

Reference: For detailed information, see “Short Sales”, at 4155.1 4.C.2.l.
Translation: Borrowers CAN use a new FHA-insured mortgage if they were current on their previous mortgage and other debts at the time of the short sale and if the proceeds from the short sale serve as payment in full.

Bottom line, missed payments = no FHA financing…for 3 YEARS. If a borrower executes a short sale while in default on their mortgage would not be eligible for a FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Some lenders can make exceptions if the default was due to circumstances beyond the borrower’s control such as the death of the primary wage earner.

Anyone eligible for the Home Affordable Foreclosure Alternatives program (HAFA) would not be eligible for a new FHA-insured mortgage for three years. WHY? Because to qualify for HAFA the homeowners has to MISS PAYMENTS! Under HAFA, the US Treasury Department provides incentives to servicers, banks and investors to pursue a short sale for seriously delinquent borrowers.

So what does this mean for you? Well for one there is lots of bad advice out there that instructs people to stop making mortgage payments as a means of getting the attention of your bank. It is true that many banks initially refuse to talk to homeowners who are current on their payments about loan modifications or other alternatives, including short sales. You must be persistent to get past the first layer of bank bureaucracy and get to the people who can discuss your situation with you. You must also have a REAL hardship, not just be teed off that your home has lost value. In general, I would say, it is best to have the help of people in the real estate business who have been trained and have experience in dealing with the lenders in short sale situations. I have aligned myself with one such full-time negotiator to provide that help. You can read more about short sales and the process and help that is available on my Web site - MIShortSales.net.