The Federal Housing Administration insures home loans so banks can be more flexible in making loans with lower down payments and more flexible income requirements. The FHA, which is self-supporting, was created in 1934 during the depths of the Great Depression to try to revive the housing market.

Here's what the FHA says about loans after foreclosures and short sales:

Previous mortgage foreclosure

Borrowers are generally not eligible for a new FHA-insured mortgage if, during the previous three years:

  • their previous principal residence or other real property was foreclosed, or

  • they gave a deed-in-lieu of foreclosure.

    Exception: The lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure.

    Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower's loan was current at the time of the divorce, the ex-spouse received the property, and the loan was later foreclosed.

    The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

    Borrower current at the time of short sale


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    A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all:

  • mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and

  • installment debt payments for the same time period were also made within the month due.

    Borrower in default at the time of short sale

    A borrower in default on a mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.

    Exception: A lender may make an exception to this rule for a borrower in default on a mortgage at the time of the short sale if the default was due to circumstances beyond the borrower's control, such as the death of a primary wage earner or long-term uninsured illness, and a review of the credit report indicates satisfactory credit before the circumstances beyond the borrower's control that caused the default.

    On a short sale, long-term job loss or layoff would be considered an exception considered to be circumstances beyond the borrower's control.

    For details on short sales, go to www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-52ml.pdf.

    NOTE: Borrowers are not eligible for a new FHA-insured mortgage if they pursued a short-sale agreement on their principal residence simply to take advantage of declining market conditions to purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared with current market value.

    Source: FHA