There is a lot confusion out there regarding how long it actually takes after having a Short Sale, Bankruptcy or Foreclosure until a person can apply for a new FHA Loan with an FHA Lender.
Want to make a bet on the right answers? Any takers? (I know the guidelines and even I would be hesitant to take that bet with things changing so rapidly these days.)
Depending on the circumstances surrounding the event, there are possibilities for shorter lengths of time. As a direct FHA Lender in Washington State, I'm often asked by borrowers and real estate agents this exact question.
While this post is a little technical in nature, it will shed some light on just what the mortgage lenders and investors want to see.
Ideally, speaking with a lender about your specific situation is probably best, but here's the basics listed below. Call me if you need more info! Everyone's situation is different.
How to get an FHA Loan with an FHA Lender after a Short Sale
Besides the simple obvious fact that you need to put your best foot forward, have as clean a loan application file as possible, solid employment, etc... and be able to give your loan officer and underwriter the best information possible to approve your loan... There are some FHA guidelines that allow you to obtain a new FHA Loan with an FHA Lender in Washington State.
#1 When a previously owned property was sold for less than what was owed (aka short sale), borrowers are considered eligible for a FHA insured mortgage IF, as of the loan application date, all mortgage and installment debt payments were made within the month due for the twelve months preceding the short sale.
Now, let's face it. Sellers who are doing a short sale are RARELY on time on all of their payments for a year prior to the short sale. If they weren't in default, why would they be selling their home at a loss and WHY is this guideline in place? There are some rare circumstances where someone is forced to move and sell their home, but hasn't missed a mortage payment in the last year. Lender Short Sale Approvals for Sellers in these types of situations is rare, (I've never come across one yet), but I suppose it could happen.
#2 More commonly, Borrowers that were in default at the time of the short sale (or pre-foreclosure sale) are not eligible for three years from the date of the sale.* (Note my asterix? Read further for clarification)
*NOTE: Borrowers who sold their property under the FHA pre-foreclosure sale program are not eligible for three years from the date that FHA paid the claim associated with the pre-foreclosure sale.
So, what does THAT mean? Well, let's say you did a short sale... It can take a while after closing for FHA to pay back the FHA Lender for the loss they incurred. You see, FHA insures the loans against losts for the FHA lenders. Just like any insurance claim payout, all of the proper documentation needs to be in hand before the claim can be paid. Being it is a government program... well, need I say more? Suffice to say, it can take a while after closing.
Here's another example: Let's say instead of a Short Sale, you turned your home back to the FHA Lender and just gave them back the keys. This is called a "Deed In Lieu". In lieu of a foreclosure or short sale, the bank agrees to take back the keys and transfer ownership right away. Sometimes called sending the lender "jingle mail"... you know, sending the keys in an envelope? Ok, bad joke. (Note, a Deed In Lieu doesn't necessarily release your responsibility on the loan however. I suggest discussing this with legal counsel if you are considering this route.)
SIDE STORY: What is an "REO" Property?
Even after the title is transferred to the bank, it takes some time for the home to be sold, right? First it needs to be reviewed and placed in the bank's REO List inventory. (REO = Real Estate Owned, aka Bank Owned Inventory.)
When a property goes back into their REO Inventory, the bank has to 1), figure out what the market value is, 2) Obtain a Broker's Price Opinion from a local Real Estate Broker, 3) they then have to decide what value to list it at in the MLS so it will sell quickly. If it's not priced correctly, or needs a lot of work, it could take months to sell... Then, if it doesn't sell, eventually the bank may even decide to just let it go to county auction to the highest bidder.
How to get an FHA Loan with an FHA Lender in WA after a Short Sale (Continued...)
As you can see, it could take a long time for this whole process to happen, and FHA to pay out the claim to the FHA Lender. Only after the home is finally sold and "off the books" does the clock start ticking.
FHA's rules state that if the prior loan was an FHA lender mortgage, then the borrower has to wait 3 years from the date that FHA/HUD finally PAID OUT THE CLAIM to the FHA lender and paid off the loan to the FHA lender.
ARE THERE ANY EXCEPTIONS TO THIS 3 YEAR RULE?
Yes. Per FHA Guidelines, FHA Lenders may make exceptions for borrowers in default at the time of short sale if:
- The default was due to circumstances beyond the borrower's control (such as death of a primary wage earner, long term uninsured illness, etc.);
- And the credit report reflects satisfactory credit prior to the circumstances (beyond the borrower's control) that caused the default.
Some Fine Print: Borrowers who pursued a short sale agreement on their principal residence to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance are not eligible for a new FHA Lender insured mortgage. (Translation? Just because your home was under water doesn't mean you can sell that one on a short sale and go buy another home at better market values. You have to wait three years... unless you can convince an underwriter that it was a financial hardship outside of your control.)
Real life Stories / Examples:
I recently had a borrower who had waited 18 months from the time they had turned over their keys for the claim to be paid out. Fortunately, they were now buying with a VA Loan and we were able to get them approved. Ask me more about THAT one... Great story.
Here's an additional example... I got a call from a potential buyer who found out last week that the home he thought had all been transferred and included in a Bankruptcy three years ago hadn't even been transferred yet to the FHA lender servicing his old loan... That's right. THREE YEARS LATER. Bank A sold the loan to Bank B... Bank B sold the loan to Bank C, Bank C gobbled up by Bank D, and now Bank D is trying to figure out what the deal is with the house... three years down the road, and the 3-year waiting period hasn't even started for this poor guy yet! Think there may be a problem in the system?
You may be saying, "OK, now I'm not really sure if I'm three years out! How can I find out when FHA actually paid out the claim on my FHA loan?"
If you're wondering if you may be within that 3 year window but you're just not sure, simply contact me. As a Direct FHA Lender in WA, we can access the FHA's information system on your behalf to find out very quickly. It's important to know this information BEFORE you get under contract on a new home purchase... Trust me.
Many people also have Bankruptcies involved with their Foreclosures or Short Sales. If that is you, be sure to read these other posts:
Helpful Blog Posts:
How to get an FHA Loan with an FHA Lender in WA after a Bankruptcy
A Chapter 7 Bankruptcy (liquidation) does not automatically disqualify a borrower from obtaining an FHA mortgage...
How to get an FHA Loan with an FHA Lender in WA after a Foreclosure
A borrower whose previous principal residence or other real property was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new FHA-insured mortgage. However...
Read more: How to Get an FHA Loan with an FHA Lender in WA After a Foreclosure
If you have additional questions, please don't hesitate to ask! Contact us today!