Can I get a mortgage after a short sale of my home?
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If you’re having trouble making mortgage payments or underwater on your home, you may be able to pursue a short sale, which allows you to sell your home for less than the amount still owed on your loan while having the remainder forgiven.
After a short sale, however, getting another mortgage won’t be easy. You’ll likely have a minimum waiting period before you can qualify for another loan, and you might also need to improve your credit score and save for a down payment to qualify for a mortgage after a short sale. For instance, there’s a waiting period of up to four years for conventional loans after a short sale.
The consequences of a short sale
Often, a short sale is a way for a distressed homeowner to avoid foreclosure, which can have more severe financial implications. Both a foreclosure and a short sale can damage your credit, but the latter may be less harmful. Still, if you’re wondering how long a short sale stays on your credit report, the answer is seven years, which could impact your ability to get a loan in the future.
“The reasons can be varied, but a short sale often happens because the seller paid too much or borrowed too much for the property, or the market has dropped and the property’s market value is less than the mortgage balance,” explains Abe Kahan, CEO of TrueRate Services, a commercial real estate investment advisory firm.
“Typically, the bank or lender agrees to a short sale to recoup a portion of what’s owed to them,” Kahan says.
Because you’re obligated to fully repay your mortgage, you and your lender have to agree to the short sale before it can proceed, says Suzanne Hollander, attorney and real estate professor at Florida International University in Miami.
“The ‘due on sale’ clause of a mortgage is a type of acceleration clause that requires the borrower to pay the entire debt at the time of the property sale,” Hollander says. “That’s why a borrower must formally request the lender’s permission to sell the property for less than the loan amount via a short sale.”
Hollander cautions that lenders have specific policies or procedures that must be followed to pursue a short sale. The process commonly takes a long time, as well, and many lenders decline short sale requests, or don’t respond to them at all.
How to get a mortgage after a short sale
The good news is you can qualify for a new mortgage after a short sale, but it can be difficult and more time-consuming. You may see higher mortgage rates, too.
“When you do try to get another mortgage, realize that lenders are going to be more cautious,” says Steve Nakash, executive managing director of Blue Spot Home Loans, a division of Cherry Creek Mortgage, in Greenwood Village, Colorado. “You now have a history of not being able to pay, and lenders will scrutinize your credit after a short sale to ensure you can make the new payments.”
Kahan notes that a short sale can bring down your credit score anywhere between 50 to 200 points, which can put many loans out of reach. For instance, it may be difficult to get conventional loans after a short sale, as they typically require a minimum credit score of 680. FHA loans require a score of at least 500 if you make a 10 percent down payment, or at least 580 with 3.5 percent down.
You can work to improve your credit score to the minimum needed, but doing so will take time and effort.
“Saving up a higher down payment than the minimum the lender requires can also speed up the process,” says Raisul Islam, chartered accountant and director of Hadee Lutful & Co.
Minimum waiting period to get a mortgage after a short sale
Depending on the loan type, there are minimum waiting periods before seeking a new mortgage or refinancing after a short sale. Note that these are general requirements, and may vary depending on your personal financial situation.
|Loan type||Minimum waiting period|
|Conventional||2-4 years with exceptions|
|FHA||3 years with exceptions|
|VA||2 years with exceptions|
|Non-qualifying (non-QM)||No requirement|
- Conventional loan – You could qualify for conventional loans after a short sale in as little as two years, but you’ll likely need to have a 20 percent down payment and demonstrate “extenuating circumstances” that led to the sale, such as job loss. If you have less than 20 percent down, you’ll have a longer wait: generally four years with 10 percent down and seven years with less than 10 percent down.
- FHA loan – For an FHA loan, you’ll likely have to wait three years to get a mortgage after a short sale unless you can prove extenuating circumstances, which could shorten the wait to one year. You may also be able to apply for a mortgage with no wait whatsoever if you weren’t in default on your prior mortgage at the time of sale, and you paid it on time in the year before the sale.
- USDA loan – With a USDA loan, you’ll generally have to wait three years to apply for a new mortgage, even if extenuating circumstances contributed to the short sale.
- VA loan – At two years, VA loans have the shortest waiting period, and there may even be no wait at all if you made payments on time prior to the sale.
- Non-qualifying mortgage (non-QM) – For a non-qualifying mortgage, there may be no waiting period, but keep in mind that these loans can require a larger down payment and charge higher interest rates than other types of loans.
Rebuilding credit after a short sale
Make no mistake: A short sale can damage your credit. And like a foreclosure, it will stay on your credit report for seven years. If you want to buy a home in the future, you’ll need to repair your credit to be eligible for the best interest rates and loan programs possible.
“If a short sale is the only blemish on your credit report, you should be able to rebuild your credit relatively quickly during your waiting period,” says Nakash.
If your credit report shows more issues, however, you may need to do more work to boost your score, including these steps:
- Review your credit report at AnnualCreditReport.com, and correct any errors or problems you spot.
- Pay off your existing debt as best you can.
- Avoid making late payments and keep your credit utilization low — below 30 percent if possible.
- Avoid applying for two or more credit accounts in a short amount of time. It’s best to separate your applications by a few months so that your credit isn’t dinged by multiple inquiries.
- Don’t close unused credit cards. You can also consider applying for other new lines of credit, but only if you intend to make payments on time and use it responsibly. If you get denied, you can try applying for a secured credit card or becoming an authorized user on another person’s credit card.
- Determine how long it will take you to save up for the minimum down payment needed on your next loan, and work diligently toward that goal.
- Shop around carefully for loans among several lenders, and compare rates and terms thoroughly.
Keep in mind that just because you can apply for a mortgage soon after a short sale doesn’t necessarily mean you should.
“It’s important to demonstrate financial stability before applying for another mortgage,” Islam says, “and you should be committed to proper money management so that you don’t face a short sale ever again.”
One of your goals might be to build your emergency savings so that you can be prepared for the unexpected in the future.
“Bad things sometimes happen to good people — bankruptcies occur, people lose their jobs and people get sick. That’s why it’s always smart to have six months of emergency funds on hand to weather these types of situations,” Nakash says.