Fair Warning: Those New Jersey home buyers wanting to use FHA financing to purchase a property in connection with a short sale better first take a look at the revised requirements issued by HUD in late December.
Quick Review:
- Applicants for new FHA insured mortgages will be turned down – effective immediately – if they participated in a short sale of their principal residence, simply to “take advantage of declining market conditions,” or to “purchase a similar or superior property at a reduced price within a reasonable commuting distance” of the house they disposed of via a short sale.
- FHA apparently believes that some homeowners may be renting out their current houses in order to buy others through short sales, so buyers and lenders should make sure that qualification is based on the new guidelines as they apply to the new purchase and the limited use of anticipated rental income needed to qualify. The rules are restrictive and limit consideration of rental income from a vacated residence as part of the qualifying income to purchase another property.
- FHA says lenders “may consider” rental income, minus an appropriate vacancy factor, when the applicant’s loan to value ratio or LTV on the vacated property is 75 percent or less.
So, what’s the point? FHA does not want to finance a horde of rental properties where the current owner-occupant simply wants to take advantage of a big deal in their local market that happens to be listed as a discounted short sale.
Even if that purchaser fully intends to occupy the replacement house as a principal residence, FHA will want to play it safe on qualifying that buyer in terms of income sources. The moral of the story being that if you intend to use anticipated rental income from your “former” home to qualify for the FHA loan on a new home you’re buying, seek expert guidance on whether that scenario will work for you.
In general, homeowners who dispose of their houses though short sales can qualify for FHA financing on another house only if they are current in payments on the mortgage for the previous year as well as on all installment debt.
On the other hand, homeowners who default on their mortgage, and used the short sale as an alternative to a foreclosure, generally will not be eligible for another FHA mortgage loan until three years following the close of the short sale.
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