Avoiding foreclosure is always a good option, and a short sale is one option many homeowners turn to when they are unable to continue to make payments and owe more on the home than they could sell it for. There are different rules on how short sales can impact the seller when looking to obtain mortgage financing in the future. This is particularly true when it comes to FHA mortgage short sales.
What is a Short Sale?
A short sale is where a homeowner is asking the bank to settle for less of a payoff than the balance of their current mortgage when selling their home. Mortgage companies often work with homeowners in this situation to avoid the lengthy and costly foreclosure process. An example might be where someone owes $200,000 on their mortgage but due to declining values on homes or borrowing more than the home was worth, they could only sell the home for $190,000. In this case, the homeowner might ask the bank to take a “short” of $10,000 plus real estate commissions and fees. This would allow the bank to avoid a foreclosure sitting on their books and the homeowner can avoid foreclosure and/or a large chunk of money out of pocket when they sell. Most mortgage companies will not even consider a short sale unless they see the homeowner is currently past due on their monthly payments.
How FHA Short Sales are Different
When you, possibly with the help of a real estate agent, negotiate a short sale on an FHA mortgage with the mortgage company, the amount of the loss will be noted. The amount of the loss that the mortgage company took is covered through FHA mortgage insurance, up to a certain amount. The problem is that FHA has a central database called the FHA Connection that all losses are recorded. Doesn’t seem so bad; so what they have my name on a database, but the lender allowed the loss, so I am ok. Well, maybe so, but maybe not. When you obtain FHA mortgage financing, the most lenient and minimal down payment A-paper mortgage available today, you must past what is called a CAIVRS authorization. This searches the FHA database for several factors, one of which is whether you have had a FHA short sale in the past. If so, the report shows a claim and that claim must be paid prior to obtaining an FHA mortgage.
So what can you do if a short sale is the only alternative? Complete the short sale, and know that in the future you will have to pay off that claim to obtain an FHA mortgage in the future or you can just do Conventional type financing and not worry about it. A short sale will likely look better than a foreclosure, but there will still be a time frame between when the short sale is completed and when you will be able to obtain A-paper mortgage financing. This time frame is likely 3 years, although some exceptions are made and talking with a competent mortgage lender will help you in determining your specific situation.
Lending a hand,
Scott Wynn
