subject: Investor Report: HUD Guidance [print this page] Investors and others who expect to use FHA financing in connection with a short sale better check out the latest guidance issued by HUD last week.
A letter to lenders by FHA commissioner David Stevens essentially spells out the agency's revised policies on short sales.
Here's a quick overview:
Number one: 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.
Since FHA apparently believes that some homeowners may be renting out their current houses in order to buy others through short sales, Stevens's letter cautions lenders to make certain such applicants qualify under the agency's strict rules relating to rental income.
Those rules generally limit consideration of rental income from a vacated residence as part of the qualifying income to purchase another property.
In its guidance, 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.
FHA rules also permit consideration of rental income when the borrower is relocating because of an employment change and has a one year signed lease agreement.
What FHA is saying with its new guidelines for lenders is this: We don't want to finance a bumper crop of rental investment houses where current owner-occupants spot a great deal in their local market that's listed as a discount-price short sale.
Even if that purchaser fully intends to occupy the replacement house as a principal residence, FHA says in effect: We want to play it safe on qualifying that buyer in terms of income sources. So we're going to be really strict when part of the applicant's qualifying income comes from renting out his or her former home.
Stevens added that people 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 debts.
On the other hand, short sellers who are in default on their mortgage - and used the short sale as an alternative to a foreclosure by their lender - generally will not be eligible for an FHA-insured home purchase loan for three years following the close of the short sale.
