The U.S. Department of Housing and Urban Development (HUD) recently released a letter to lenders covering short sales and short payoffs. Mortgagee Letter 09-52 is effective immediately and provides guidance to lenders regarding borrower eligibility when pursuing a new Federal Housing Administration (FHA) mortgage.

In a nutshell, FHA guidance included:

Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on their principal residence simply to:

• Take advantage of declining market conditions, and
• Purchase, at a reduced price, a similar or superior property within a reasonable distance.

Borrowers are considered eligible for a new FHA-insured mortgage if:

• They were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• The proceeds from the short sale serve as payment in full.

Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances, such as a short sale being due to the death of the primary wage earner.