FHA Announces Rules for Short Sales and Short Pay Offs

January 7, 2010

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.

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