Buying a home after a short sale: what you need to know

Homes & real estate
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Buying a home after a short sale: what you need to know

Homes & real estate

“Short sale." Some people may look at the phrase as a modern-day financial scarlet letter, but in fact, a short sale, while unfortunate, is not an irreparable strike against you or your credit.

The good news is you can still qualify for a home mortgage after a short sale. In some cases, it may take as long as four years before you’re eligible, but in others, you might qualify as soon as the day after your short sale closes.

Let’s take a closer look.

Credit Score

While a short sale may not have the same impact as a foreclosure or bankruptcy, your credit score will likely still take a hit. As such, you want to do all that you can to bring your score back up as high as possible. Some actions include:

  • Always paying your bills on time
  • Keeping your credit card balances low
  • Reviewing your credit report for any mistakes

Regarding the last point, make sure your short sale is correctly listed on your credit report as “Paid/closed with zero balance” and not as a foreclosure or some other notation that may carry more negative consequences.

Regardless of the programs below, you’ll still need a strong credit score and report to qualify for a new loan.

Home loans

Broadly speaking, there are three types of home loans available:

  1. Fannie Mae/Freddie Mac
  2. FHA
  3. Private lenders

Fannie Mae/Freddie Mac Loans

For short sales that were due to extenuating circumstances, the waiting period for Fannie Mae/Freddie Mac loans is two years.

For short sales without extenuating circumstances, the waiting period is four years.

Verifiable, documented “extenuating circumstances” include:

  • The death of a wage-earner (not necessarily the sole wage-earner)
  • A catastrophic illness or injury
  • The involuntary loss of a job
  • A divorce that immediately reduces household income

NOTE: Being unable to afford the increased interest on an adjustable-rate mortgage is not considered an extenuating circumstance.

FHA Loans

Zero Wait: You may immediately qualify for an FHA loan if:

  • all mortgage payments on your prior mortgage were made on time for 12 months before the short sale, and
  • all installment debt payments were made on time for the same time 12 months

Three Years: If you defaulted on your then-current mortgage at the time of the short sale you will need to wait at least three years before you can apply for a new FHA loan.

As with the Fannie Mae and Freddie Mac loan programs, if there are verifiable extenuating circumstances, you may be able to qualify sooner.

Note that FHA loans may carry higher rates than Fannie Mae loans and will also require you to pay for mortgage insurance.

Private Lender Loans

Many private lenders will follow the post-short-sale guidelines adopted by government-backed loan programs, but some may waive them provided you’re willing to make a larger down payment (>25%) and pay a higher interest rate.

A Fresh Start

There’s no denying that a short sale can be a traumatic experience, but it’s not an insurmountable one.

If you’re determined to purchase a home again, take the time to research different loan programs, do all that you can to bring your credit score up, and then contact a real estate professional to help find a home that falls within your means.