Getting a Mortgage After a Short Sale

February 6, 2013 6 Comments »
Getting a Mortgage After a Short Sale

Over the past several years, scores of homeowners have elected to ditch their unmanageable mortgages via short sales to avoid foreclosure.

In fact, it’s estimated that roughly 370,000 short sales closed last year alone. Because short sales have been so popular, there will inevitably be tons of former homeowners re-entering the marketplace in the near future.

In fact, there are already plenty of so-called “boomerang buyers” who dumped their old homes via short sale and acquired new ones.

Of course, whether you’ll actually be eligible for a mortgage after a short sale will depend on a number of factors.

There are already plenty of qualification requirements for a mortgage, and you’ll need to add “prior short sale” to that list.

The Wait Depends on the Type of Mortgage

Perhaps the easiest loan to qualify for after a short sale is a FHA loan, mainly because it has the shortest post-short sale waiting period.

In fact, it has NO waiting period if you weren’t delinquent on your former mortgage during the 12 months preceding the short sale and the proceeds of the sale served as payment in full.

Additionally, you must have stayed current on all other installment debts during the same time period.

Sadly, most borrowers who pursued short sales didn’t keep up with mortgage payments because lenders tend to be more willing to work with those who are behind and in danger of default.

Assuming you did stay up-to-date, you can’t buy a similar property within a “reasonable commuting distance” of your old home.

In other words, if you sold short just to take advantage of declining property values, you won’t be approved for a FHA loan.

So only a small percentage of those who pursue short sales will be eligible for a FHA with no waiting period.

If you were delinquent when you pursued the short sale, the FHA waiting period is three years, though it can be reduced if you can prove extenuating circumstances.

The main advantage to a FHA loan is the low-down payment requirement, as compared to conventional loan options.

For VA loans, the waiting period after a short sale is two years. However, there is NO waiting period for those who managed to avoid late payments on the mortgage and all other lines of credit, similar to the FHA rule.

For conventional loans, it depends if the new loan is backed by Fannie Mae or Freddie Mac, which shouldn’t matter much to the borrower.

Fannie Mae is the more lenient of the two, allowing a new loan just two years after the completion date of the short sale.

However, you must put a hefty 20% down. Again, if you can prove extenuating circumstances, Fannie will allow a loan after two years with as little as 10% down.

If you don’t have a good excuse, the waiting period is four years for homeowners who put down between 10-20%.

For those who aren’t able to come up with at least a 10% down payment, the waiting period jumps to a staggering seven years, which is the same waiting period for a foreclosure.

For Freddie Mac, the waiting period is four years, regardless of LTV, for what they call “financial mismanagement,” or just two years if you can prove extenuating circumstances.

For the record, extenuating circumstances include things like the passing of the primary wage earner or a long-term illness.

Note: There are other types of loans out there, such as jumbo loans, VA loans, USDA loans, and so on.  Be sure to inquire about all types when working with your loan officer or mortgage broker to cover all your options.

Your Credit Score Matters Too

On top of these waiting periods, you must also re-establish your credit to meet the minimum score required by the lender who originates your loan.

In other words, if your credit score is shot as a result of the short sale, and hasn’t improved during the waiting period, you still may not be eligible.

And even if you are eligible, your credit score may result in a higher mortgage rate, so there are consequences beyond the waiting period.

But this should illustrate the major benefit of a short sale vs. foreclosure.

When you get foreclosed on, the waiting period to obtain a new loan is significantly longer.

So even if the credit score impact of both a foreclosure and short sale are similar, this detail alone is pretty important for those looking to get back in the game.

Tip: After a short sale, be sure to stay current on all your credit lines to ensure you re-establish good credit and get your score back to a reasonable level.

It will make qualifying easier and should result in a lower rate on your mortgage.

Short Sale Waiting Periods

Getting an FHA Loan After Short Sale:

- NO waiting period if certain conditions met (see above)
– Otherwise three (3) years unless extenuating circumstances (it’s now one year)

(HUD source)

Getting a VA Loan After Short Sale:

- NO waiting period if certain conditions met (see above)
– Two (2) year waiting period otherwise

Getting a Fannie Mae Loan After Short Sale:

- Two (2) year waiting period if you can put 20% down
– Four (4) year waiting period for those who put 10-20% down
– Seven (7) year waiting period if less than 10% down
– Two (2) year waiting period if extenuating circumstances and 10%+ down

*After August 16, 2014, this will change to a standard 4-year waiting period regardless of LTV, or a 2-year waiting period if the borrower can prove extenuating circumstances. For some this could shorten or lengthen the wait.

(Fannie Mae source)

Getting a Freddie Mac Loan After Short Sale:

- Four (4) year waiting period regardless of down payment
– Two (2) year waiting period if extenuating circumstances

(Freddie Mac source)

*The Fannie and Freddie rules are the same for a deed-in-lieu of foreclosure.

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6 Comments

  1. Greg B February 7, 2013 at 3:19 pm -

    My understanding was the waiting period for applying for a FHA purchase loan after you have had a short sale that was delinquent at time of closing is 2 years. The waiting period would be 3 years for FHA purchase transactions following a foreclosure. Can you please correct me if I am wrong here?

  2. Terri Club May 3, 2013 at 12:18 am -

    I had a client who wanted to buy a home in Arizona, but he had a foreclosure. After researching the web I found a loan program at cfsflex.com, they allow a mortgage after a foreclosure. There is no waiting period. Good to see lending options coming back.

  3. Craig February 11, 2014 at 6:09 pm -

    We have a NO waiting period loan after Short-Sale or Foreclosure available. Its a 20% downpayment and 660 minimum mid FICO score requirement. Take a look at my website for more info.

  4. Ernest February 25, 2014 at 2:48 am -

    What is the waiting period to get a USDA loan after a short sale?

  5. Colin Robertson February 25, 2014 at 11:18 am -

    I believe the USDA loan program has a three year waiting period after short sale, but you can get approved sooner if you experienced a documented hardship such as a medical issue or a job relocation AND have no recent late payments and a decent credit score.

  6. Michael Evans October 29, 2014 at 8:38 am -

    The Majority of Families who have had a Foreclosure or Short Sale end up having a history of Mortgage Late payments. and It can be confusing and deflating to consumers who have to wait Years after the unfortunate incident of a Foreclosure or Short sale or Deed in Lieu. Most of these consumers are now renting from a landlord or are living with family or friends to have a roof over their head.
    However there is a solution to help these consumers in approved states get back the Pride of Homeownership and Not have to wait years to buy their home again. Feel free to contact me so I can share the right path with a solid solution to your new home goals.

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