Approved Financing Immediately Following a Short Sale

A story on the news ran last week regarding the ability for homeowners to short sale and then finance a new home almost immediately. Although this may be in the case in certain circumstances, if the borrower were to finance the new home through Conventional Financing then certain rules still apply.

For example:

• Borrower is Ineligible if:
  • 30 Day late is reported on their previous mortgage
  • Short Sale on previous home was completed for advantageous reasons to the borrower not due to hardship

FHA Insured Financing is available, in some cases, in a shorter term than the standard minimum of 2 years for Conventional Financing but the following conditions must be met.

• All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale
• All installment debt payments for the same time period were also made within the month due
• Borrowers in default on their mortgage at the time of the short sale are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure

Exceptions can be made if:

• Default was due to circumstances beyond the borrower's control (such as death of primary wage earner, long term un-insured illness, etc.) and/or
• The review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower's control that caused the default.

FHA may also allow refinancing on Short Payoffs if:

• The existing note holders agree to write off the indebtedness that cannot be refinanced due to value
• There is insufficient equity in the home based on current appraised value and/or
• The borrower has experienced a hardship.

All of the above information can be found in HUD Mortgage Letter 09-52, 4-155.1.

In summary, there are cases where a borrower could immediately buy a new home following a short sale, but it will be in the rarest of occasions. Most short sales will not occur without a borrower "stopping performance" on the loan (meaning they miss a payment). I believe it will be up to the short sale negotiator/realtor to make the short sale happen without the borrower missing a payment, but it will take an extenuating circumstance and some honest to goodness hard work to get a lender to agree to the short sale if the loan is still performing.

Hopefully the above will help to dispel any questions regarding the story that ran on the news last week.