FHA Shortens Short Sale Requirement
In their mortgagee letter 2013-26 in August the US Department of Housing and Development (HUD) decided to change their criteria for the better when it came to helping customers who previously had a short sale, deed in lieu, foreclosure, etc.
This is Good News for Consumers who want to get off the shelf sooner rather than later
Before the change, the FHA guideline was that a borrower with a previous short sale had to wait three years from the certificate of title date before he or she could go buy another home. Now the requirement has been lowered to the one year mark with a few caveats.
The three caveats are:
1.) The borrower needs to demonstrate the “economic event” that shows at least a 20% loss of income whether it was due to illness, loss of employment or just reduced income due to extenuating circumstances.
2.) Then the borrower needs to show that the event has been sufficiently repaired and he or she has maintained a good residency history and good credit for the last twelve months.
3.) The borrowers need to complete a HUD approved housing counseling class from a HUD approved counselor.
This is certainly good news for customers who have had a short sale or a foreclosure and this will allow perfectly good borrowers to get off the fence a lot sooner. It is important to keep in mind that these new borrowers still need to qualify with at least a 620 middle credit score and sufficient income and credit to get an approval through automated underwriting.
Typically when a short sale hits a credit report it damages the credit just like any other collection that reports “settled for less than amount due”. Depending on the depth of the borrower’s credit report it will take a good 6 months to a year to build those scores back up. If the customer had say a 740 middle score and established credit he or she could expect a 60-80 point drop for at least a half a year.
If the borrower had a limited credit profile to begin with they should probably consider getting out there and trying to re-establish credit once again. The bureaus automatically take into account the number of trade lines paid on time vs the number that are derogatory.
Good places to start building credit again include clothing stores and secured credit cards, electronics or furniture financing. Establishing Credit Again It is O.K to start small just make sure the history is on time and try to maintain credit card balances at 40% or less of the total credit limit. FHA will still require a perfect residency history after the short sale so pay your rent on time and pay it with a check.
The housing counseling is not as bad as it sounds and can be accomplished in or two visits to a FHA approved counselor.
To read all 15 pages of the August mortgagee letter 2013-26 please click on the attachment below.
FHA Bulletins explains the new extenuating circumstances requirements to purchase a home in as little as one year after a short sale .