Getting a Mortgage After a Short Sale

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.

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 as well.

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The Short Sale Waiting Period Depends on Mortgage Type

  • The short sale waiting period
  • Is dependent on loan type
  • Along with what transpired
  • Those with extenuating circumstances may not have to wait at all

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.

Get a Conventional Loan Just Two Years After Short Sale

  • If you sold your home short
  • And can prove extenuating circumstances
  • You can get a conforming home loan just 2 years after a short sale
  • But most borrowers will have to wait 4 years to get a mortgage

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 was the more lenient of the two, allowing a new loan just two years after the completion date of the short sale with 20% down payment. But they changed that, perhaps because it sent the wrong message.

Nowadays, there is a standard 4-year wait without extenuating circumstances, or two years if you do have a valid excuse.

For Freddie Mac, the waiting period is also four years (48 months) for what they call “financial mismanagement,” or just two years (24 months) if you can prove extenuating circumstances, just like Fannie Mae.

But the max loan-to-value ratio (LTV) and combined LTV (CLTV) is 90%. That means you need a minimum 10% down payment. In other words, they want skin in the game this time around…

 

What Are Extenuating Circumstances?

  • Something beyond the borrower’s control
  • Such as sudden job loss and reduced income
  • And/or increased expenses
  • That render the borrower unable to make mortgage payments

For the record, extenuating circumstances include things like the passing of the primary wage earner, a long-term illness, a divorce, sudden job loss, etc. Basically something outside the borrower’s control that resulted in major financial hardship.

If any of these events took place, the borrower must be able to provide third-party documentation as confirmation, and they must re-establish their credit profile to acceptable levels.

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 mortgage rate as well.

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 prove extenuating circumstances
– Four (4) year waiting period otherwise

(Fannie Mae source)

Getting a Freddie Mac Loan After Short Sale:

– Two (2) year waiting period if extenuating circumstances
– Four (4) year waiting period otherwise
– Max LTV/CLTV of 90% if within 7 years of short sale

(Freddie Mac source)

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


10 Comments

  1. Edward Kezer July 20, 2017 at 2:12 am -

    I was scheduled to close on a beautiful colonial home today for $163,000, but KeyBank declined my loan at the last minute due to the short sale of my home 2 years ago. I fell, ruptured my spleen, it was misdiagnosed for 2 years, I had emergency surgery and then 2 follow-up surgeries. I could not continue working where I had a job, too long to drive between 12 to 16 hour night shifts, and too dangerous with violent psychiatric patients. I was forced to sell my lakefront home, get another job and move close to it.
    I recently found this beautiful house, just 1/2 mile from my work as an RN. It is in the exclusive part of Lewiston, Maine in the Bates College area. The seller dropped the price $40,000 for me and agreed to pay $5000 at closing. I have $40,000 in my checking account, planning $10000 down and $20,000 in improvements including insulation and heat pumps.
    The house requires nothing but minor repairs, in move in condition.
    My life partner is planning to sell her house and duplex, and will co-sign the mortgage. This would be her dream home.
    Can you help me secure this property. I have a contract to close on August 4th. I waited 49 days for KeyBank to deny my loan today. I missed 2 closing dates

  2. Tiffonie February 27, 2017 at 9:37 am -

    Michael Evans I am interested in hearing from you.

  3. Colin Robertson April 5, 2015 at 4:05 pm -

    Hi Marty,

    Possibly if you can prove extenuating circumstances related to your short sales. Might be best to speak with some brokers/lenders to see where you stand.

  4. Marty April 5, 2015 at 12:43 pm -

    I had to short sell 2 rental properties a little over 3 years ago. This was due to a disability retirement from my job as a police officer. My credit is back up to 675 and my wife is over 700. We want to refi our home in California where we currently pay 5.5%. Value is about 375k and we owe 193k. We want to take out 30k for home improvements. No FHA as we don’t want PMI.
    Any lenders interested?
    Thanks, Marty

  5. 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.

  6. 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.

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

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

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

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

  9. 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.

  10. 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?

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