1)never late in the last 12 months either on the mortgage or any other instalment debt.
2)The caveat is that the purchase should not be to take advantage of the declining market and the borrower is not trying to purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.
Such borrowers may be immediately eligible ( without a wait)for a fha loan,if the above conditions are met.
The first condition regarding not being late is something which is a fact and is easy to distinguish.The loan officer ,underwriter and agent need to apply their mind to the second part of the condition.The intent behind this is to avoid misuse by borrowers to sell underwater homes and buy similar cheaper properties in close proximity to where they lived earlier.
Questions that come to mind are
1)Is there a genuine need to buy a large property due to increase in family size
2)Is undersizing a property necessary and can it be substantiated with drop in income
3)Any other reason that can justify why a borrower would need to sell their current home and buy another one right away.
So bottomline is to have a perfect payment history on mortgage/ instalment debt( in the last 12 months )and have strong reasons to buy within commuting distance of the property being short sold.A borrower relocating to another city due to job change ( not within reasonable commuting distance ) would be a good example of meeting the requirement of second condition.