This weekend I received an email from a trusted agent with the question "Is this legitimate?" It contained a link to a website that had been promoted through her office. The website promoted mortgages for buyers who were short-selling their current residence and purchasing a new one.

At first my thought was, "You have to be kidding me?" It seemed sort of off base to expect a lender to finance a borrower who was basically walking away from another lender and costing them money. As I thought about though I considered the FHA refinance program that will allow "short-refinances" if current lenders are willing to take reduced pay-offs to allow an FHA mortgage to refinance the current mortgage.

Investigating more it turns out FHA does allow mortgages to borrowers who sell their current residence under short-sale provisions and then purchase a new home without the standard three year wait. There are certain conditions that must be met--some of the conditions are a little subjective and on these I would not suggest trying to push limits.

Per FHA mortgagee letter, FHA will insure a mortgage for borrowers who short-sell their current residence and purchase another one provided all of the following requirements are met:

• All mortgage payments must have been made within the month due for the 12 month period prior to the short sale
• All installment payments must have been made within the month due for the 12 month period prior to the short sale
• The short payoff must serve as payment in full on the existing liens and the existing mortgage servicer may not require repayment of the difference between the mortgage balance and the short payoff
• Borrowers may not obtain a short sale to “take advantage of declining market conditions and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance” (Borrowers who obtain a short sale due to employment relocation that is not within reasonable commuting distance from the property being sold short are eligible for FHA financing, provided all other short sale and purchase requirements are met)
• Borrowers in default on their mortgages at the time of short sale are ineligible for FHA financing for three years from the date of the short sale unless the default was due to significant extenuating circumstances and the borrower had satisfactory credit prior to the extenuating circumstance. To waive the three year waiting period for borrowers who were delinquent at the time of short sale, requires a Total Scorecard “approve” or “accept” response for the new purchase transaction
• FHA will not approve loans for borrowers having both a short sale and previous bankruptcy and/or foreclosure

The keys: All credit payments current through the short-sale, new home must be "inferior" to home being sold (i.e. smaller, significantly lower value than price on short sale, and/or geographically distant from current property).

The question: will a lender approve a short-sale on a borrower who is current on their existing mortgage and has the assets available to provide down payment and closing costs for a new FHA mortgage? With the new loan modification program being pushed by the Obama Administration and Bank of America saying it will reduce principle balances by approximately $3 billion to avoid foreclosures, many lenders may see a short-sale as a cheaper alternative, in which case this may be a productive tool for all involved.

It is a very small needle to thread, and no doubt many will try to force clients or themselves through that small hole. I wanted to make you aware as you may receive offers on your listings from buyers trying this process, or you may have clients who may be eligible.

Before attempting this difficult transaction my advice is to have the buyers fully qualified and approved by FHA underwriter before beginning the process. Also do not try to push the envelope on what is considered an "inferior residence."

If you have any questions, or potential clients who may fit the profile and have questions, please do not hesitate to contact me for an honest evaluation of the process and their ability to qualify.