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FHA Limits Loan Eligibility

by Karen Lawson
December 22nd, 2009

The US Department of Housing and Urban Development (HUD), under pressure from Congress and taxpayer watchdogs to shore up dwindling FHA cash reserves, is attempting to further minimize risk associated with defaulted FHA mortgage loans. In its Mortgagee Letter 09-52 dated December 16, HUD clarified FHA policy for insuring FHA loans for borrowers who have sold a home through a short sale. A short sale, sometimes called a pre-foreclosure sale, involves selling a home for its current market value when that value is less than the mortgage amount.

FHA Loan Guidelines on Short Sales

Here are some FHA loan guidelines concerning potential borrowers undertaking short sales:

  • * Taking advantage of market conditions. Borrowers who use a short sale to take advantage of declining market conditions, for buying a similar or larger home within a reasonable commuting distance, are ineligible for FHA loans. In general, these are borrowers who could afford to make mortgage payments but who pursued a short sale for moving to a more desirable home.
  • * Delinquency on mortgage payments. Borrowers who are delinquent on mortgage payments when their short sale is completed must wait three years after completion of the short sale to be eligible for FHA loans. This is consistent with FHA guidelines which delay eligibility for three years after a mortgage foreclosure. Exceptions can be made by FHA lenders on a case-by-case basis for borrowers whose mortgage defaults were due to circumstances beyond their control. Examples of this include the death of the primary borrower or inability to work. FHA will also insure new mortgages for homeowners whose lenders write off a portion of the existing mortgage they cannot refinance to loss of property value or borrower income.

Does New FHA Policy Help Struggling Homeowners?

The answer is yes and no. Although I agree with FHA policy not to accommodate “flippers” and those playing the distressed market solely for their own gain, I question whether it’s necessary to delay FHA financing for delinquent borrowers with documented hardship–for example, someone who’s had to sell a home with a short sale after long-term unemployment, illness, or loss of income due to death or divorce. Allowing a caveat for lenders to review such circumstances and approve FHA loans individually can help borrowers and the housing market recover.

With the new year approaching, FHA’s primary challenge remains balancing its own financial well being with its commitment to assist low- and moderate-income borrowers with buying and refinancing homes.

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