FHA Announces Rules for Short Sales and Short Pay Offs
On December 16, 2009, the Federal Housing Administration (FHA) released
Mortgagee Letter (ML) 2009-52, providing guidance to lenders and
underwriters on short sales and short pay offs. The guidance is effective
immediately and impacts FHA Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance on One- to Four-Unit Mortgage Loans.
The ML provides guidance to lenders for borrowers: 1) taking advantage of
market conditions, 2) eligible for a new FHA mortgage, and 3) in default at the
time of the short sale. According to the guidance, borrowers who enter into a
short sale agreement to take advantage of a declining market to purchase, at a
reduced price, a similar or superior property will not be eligible for a new FHA
mortgage. Borrowers may be eligible for a new FHA mortgage if they were
current on their mortgage when entering into a short sale agreement and the
proceeds from the short sale serve as payment in full. Borrowers who are in
default on their mortgage at the time they enter into a short sale agreement are
not eligible for a FHA mortgage for three years.