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I made a short sale on my last home. Does this disqualify me from FHA financing?

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Posted On: 03/04/2008

Q: I’m interested in FHA financing, but I’m not sure if I qualify. I had a home that was sold before foreclosure, so my credit report has late payments and shows that the property sold for less than amount owed – a short sale. Does this disqualify me?

A: The FHA has an excellent discussion of its basic qualification standards at www.fha.gov/owner/afford.cfm. It certainly makes sense to review your situation with several local lenders. That said, you will find roadblocks – for instance, late mortgage payments. Just how many have there been in the past year? One or two might be allowed. More? Not likely. What about other accounts?

As to that short sale, that’s a financial event that cannot be ignored. The FHA is an insurance program so when there’s a lender loss on a property, red flags go up. To the FHA a short sale simply is the equivalent of a foreclosure, so figure a three-year delay before looking at FHA financing.

Also, money not paid to the lender with the short sale used to be considered “imputed” income. Such phantom income – money borrowers never actually received – used to be federally taxable, but that’s no longer true with the passage of the Mortgage Forgiveness Debt Relief Act of 2007. Check with a CPA or enrolled agent for specific information.

Q: We’ve been looking for a house to rent. We saw one interesting property and asked the broker if the rent could be reduced in exchange for a long-term lease. The broker said no. Isn’t it common practice to discount a longer lease?

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A: In areas with slowing rental markets you may well find landlords willing to offer a discount in exchange for a longer lease, say, at least two or three years. However, there’s no rule or requirement that landlords must accept such an arrangement and certainly in a strong rental market they would have little incentive.

Q: I often see the term “exclusive right to sell” on home listings. What does that mean?

A: Most homes are listed for sale by brokers, but not all listing arrangements are the same. In broad terms, there are “open” or “general” listings, “exclusive agency contracts” and “exclusive right to sell” agreements.

With an “open” or “general” listing a broker obtains the right to sell the property, but an owner may also engage other brokers to sell the property or try to sell it himself. When the property is sold, all open listings end automatically.

An “exclusive agency” agreement means that during a given period only one broker has listed the home; however, the owner still reserves the right to sell directly and not pay a fee.

With an “exclusive right to sell” arrangement – by far the most common – the property is listed with one broker. If the property is sold during the listing period, whether by a broker or by the owner, the broker is entitled to a fee.

Each listing option has pros and cons, but there’s a bottom line: As a property owner, you have to ask which approach is most likely to result in the sale of your home at the best price and terms. To answer this question you need to look at local market trends, the services offered by area brokers and the success rates of those brokers.

The National Association of Realtors reports in a 2006 study that 69 percent of all home sellers interviewed just one broker before listing their property for sale. Given a diversity of broker skills, pricing opinions and marketing approaches there’s no reason not to speak with several brokers before selecting the one best able to serve your needs.

Q: I was interested in leasing a property, but I thought the rent was too high. I spoke with the owner, who explained that the property had a given value and that the rent actually represented a small return on his investment. As a renter why should I care about the owner’s profit? I didn’t rent from this guy.

A: You should care very much. An owner who has a good return from a property has the cash to make repairs, plus a lot of incentive to keep his investment in good condition.

If the property produces little if any profit, then even if the landlord is the best person in the world, where does he get the cash to maintain and improve the property?

You can bet that a financially weak landlord will raise your rent as soon as possible. Then you’ll face the cost and inconvenience of moving – or paying a lot more to the landlord.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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