Getting a Mortgage After a Short Sale: Tips, Tricks, and Waiting Periods

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.

The Short Sale Waiting Period Depends on Mortgage Type

• The short sale waiting period is dependent on loan type
• Along with what transpired leading up to the short sale
• Those with extenuating circumstances may not have to wait at all
• Assuming they weren’t delinquent on the loan before the sale

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.