The Federal Housing Administration (FHA) has tightened its guidelines on short sales so that borrowers who defaulted on their previous mortgages can't get a new FHA-insured loan.
The new guidance is designed to prevent borrowers who want to take advantage of the decline in house prices to buy a new home at a reduced price using an FHA loan for doing so.
"Borrowers in default on their mortgage at the time of a short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years," FHA said in a mortgagee letter.
The new policy has been causing problems for some lenders with loans in the pipeline, according to Bud Carter, an FHA consultant with Potomac Partners in Washington.
In general, FHA will not approve loans if the borrower has defaulted within the past three years.
However, FHA never provided specific instructions on short sales, Carter said, so lenders were dealing with this issue on a "case-by-case basis."
Mortgagee Letter 09-52 also addressed cases where a lender takes a principal writedown and refinances the borrower into an FHA-insured mortgage.
The agency clarifies that the borrower has to be current on all their payments to qualify for an FHA refinancing.