It is not impossible to buy a home after a short sale. Yes, it is true that the cards will be stacked against you and the short sale may make it very difficult to get a home loan, but still possible. In fact, some lenders will even consider you for a loan in as little as a month after the short sale, provided you have a clean mortgage repayments records and you have a credit score of 660 or higher.
Before we dive deeper into this, just what is a short sale? A short sale happens when a homeowner decides to sell his home at a price that is lower than the amount they owe the mortgage company. When a short sale occurs, it means that not all the debs or liens associated with the property have been paid. In such a case, the seller would still be responsible for settling the outstanding balance on the debts associated with the property.
In some cases, a homeowner may offload their home in a short sale if a foreclosure is inevitable. This means that the homeowner sells off the house to avoid it being foreclosed or taken over by the lender.
If you have ready cash, it is easier for you to buy a house even a day after the close of your short sale. However, the real estate market is very unfavorable for such buyers – even with ready money. This means that most homebuyers are forced to rely on a mortgage financier in order to buy their next home. Yet, after a short sale, you will find it hard to find a lender that will give you a loan without thorough interrogation.
Why is this?
The short sale is a red flag that will raise a lot of questions from lenders who will assume that you are a credit risk. Most lenders in the market will not even consider you for a loan for a whole seven years after the short sale. However, this should not doom you to a homeless life. If you just sold your home in a short sale or are planning to, here is what you need to know to qualify for a new mortgage loan.
Short home sellers typically have to wait for at least two years after the close of the short sale to qualify for a loan. However, the length of the waiting period may be higher based on the type of loan they want, the specific requirements by the potential seller, and the down payment they have on hand. To begin, let us focus on the different loan types that are still viable options to someone who just sold their home in a short sale:
The Federal Housing Administration requires that you wait for a minimum of three years after short selling your property. After the three-year waiting period, you can get an FHA loan with as little as 3.5 per cent down payment. Note, however, that you must rebuild your credit score within this waiting period to at least 500 to qualify for a loan.
A borrower with a credit score of 500 can qualify for 90 per cent LTV or have a 10 percent down payment. To be approved as a subprime borrower, you must have a credit score of 580 and a 3.5 per cent down payment.
If you are a veteran and need a loan after closing the short sale of your property, you are luckier than most buyers in the market in in a similar situation because a loan from Veteran Affairs is one of the easiest to qualify for. Your eligibility for a VA loan in the future will not be negated by a short sale provided you are a veteran or an active duty military personnel. However, you may have to wait for two years after the closure of the short sale before you can apply for a VA. The restrictions may be tougher if the short-sold property was financed by a VA loan.
Better still, you will not be required to have a down payment to qualify for the loan, but the new VA loan may be for a lower amount if your entitlement is reduced after the short sale.
USDA Rural Loans
While the USDA does not publish their rules on eligibility for a loan after a short sale, as a rule of thumb, you will have to wait for at least 36 months after the completion of the short sale to be eligible for a USDA rural loan. USDA considers the short sale as a foreclosure and even after the waiting period, you must meet the minimum requirements for a USDA rural loan. These are: a credit score of 640 or higher, a clean record of timely payments over the past 12 months, and no new collections on your credit report within the same period.
You will be required to wait for four years from the date the transfer of the short sale property (the date on the HUD-1 Settlement Statement) to qualify for a conventional mortgage from Fannie Mae and Freddie Mae. Even after the wait, you will also need to show that you have not had a late payment since the short sale and you have grown your credit score to at least 620 and have a down payment of at least 10 percent of the new loan.
Unlike the FHA and VA loans, conventional loans are very sensitive to credit score, which often determines the loan’s interest rate. The higher your credit score during application, the lower the mortgage rate you will get. It is recommended that you nurture your credit score to 740 or higher to get the best mortgage rates from Fannie Mae and Freddie Mae.
Reduce Waiting Period
There is a limited number of factors that affect your chances of getting a home loan without having to wait as long as your prospective lender requires borrowers to wait after a short sale. These factors include:
Were you forced to short sell your home even though it was not your fault? Perhaps you lost your job or the family’s breadwinner passed on, leaving hefty medical bills that are not covered by insurance and you have to sell the house fast? Most lenders would be willing to consider such ‘extenuating circumstances’ on a case-by-case basis and may often compromise on the waiting period for applicants who had to sell their homes in such unavoidable circumstances.
However, note that divorce is not considered an extenuating circumstance unless it resulted in a genuine extenuating situation such as the unavoidable large drop in family income.
You have rebuilt your credit score
The easiest and most straightforward way to reduce the time you have to wait before applying for a mortgage loan after a short sale is to rebuild your credit score. USDA, for instance, will consider your application for a loan if you have a credit score of 640 or higher even if it hasn’t been a year since the short sale. Conventional loan lenders are also very accommodating to borrowers with a good credit score.
You have saved enough for down payment
The FHA, Fannie Mae, and the VA would be willing to overlook the short sale waiting period when you demonstrate that the short sale was unavoidable and was not your fault. However, in most cases, you will need to prove your creditworthiness with a clean past repayment record and, of course, a shining credit score.
Rebuilding Your Credit
If you have had to short sell your home, chances are that the short selling process left a significant dent on your credit. If you have already addressed all the factors that hurt your credit score and paid all your bills and met other financial obligations, you will be glad to know that rebuilding your credit will not as difficult as you may think.
In some cases, the short sale may actually improve your credit score on the day it is added to your report because the delinquency will be indicated as 60, 90 or 120+ past due payment. This is because the short sale may be entered as ‘account settled for an amount less than originally agreed’ on the credit report, which to lenders reads ‘settled’.
Since some lenders do not even report the short sale, it is a good idea to talk to yours to find out how the short will affect your credit to strategize how best to grow it back to a healthy level. Most industry experts recommend that you diversify your credit profile as a strategy to raise your credit score fast. This means mixing different credit types, having multiple healthy credit accounts such as credit cards to get a 10 percent bump on your score.
Recovering from a short sale: what else you need to know
The journey to being a homeowner after a short sale may be rigorous and long, but it is necessary if you want to keep your dreams of ever owning a home alive. You will need to act and clear all the issues that may paint you as a high-risk borrower and with time, you will qualify for a mortgage again. There are five important points you should consider as you begin the journey back to home ownership:
Do not be a victim to someone else’s mistake
In the same way you would follow up on your credit history to make sure that it is accurate, it is important that you follow up the short sale to make sure that it was reported accurately. It is not uncommon for a servicer to incorrectly file a short sale as a foreclosure, something that credit bureaus consider the ultimate sin in real estate.
A foreclosure would have a more severe effect on your credit score considered to the short sale. This will mean waiting even longer to qualify for another mortgage. To be on the safe side, keep all the documentations from the short sale and check and double-check how it is entered on your credit report to avoid bearing the heavy weight of someone else’s mistake.
A short sale may prevent you from getting a mortgage loan straightaway, but it does not have to prevent you from ever owning a home. When your credit is in the dump, the best way for you to get back on your feet is to be patient and avoid making any mistakes that may further hurt your score – such as taking high interest payday loans you will face difficulties servicing. It is advisable that you closely and constantly monitor your credit report a year before you apply for are ready to apply for your next mortgage loan because this is the most significant period which lenders check to determine whether you are still a risky borrower.
Being proactive will pay off.
It is understandably hard to get a new loan shortly after a short sale, but there is a silver lining in the months or years that you have to wait until you can apply for another. Take advantage of this period to understand the life factors that led to the short sale and begin saving earnestly for the down payment you will need after the waiting period is over.
The transition period between mortgages is a great time to not only clean up your credit score, but also learn the requisite financial discipline you need to prove to your underwriter that things have changed since your last loan.
It’s OK to seek help
Are you stuck? Did the short sale process wear you out and your life is in too much shambles to be objective? It is okay to seek professional help to get personalized advice on the best way to get back on your feet – or more accurately – to get back on track as you make your journey home.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.