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If you have problems paying your mortgage or are underwater at home, you may be able to pursue a short sale. This process helps avoid foreclosure by selling your home for less than what is still paid for the loan, while allowing the rest. However, there are also drawbacks, such as the fact that short-term sales can affect your ability to buy a home in the future. Here’s what you need to know about getting a mortgage after a short sale.
The impact of short selling on your credits
There are many reasons to choose to sell your home through short sales. This is a process in which lenders can sell less lenders than they have outstanding mortgages. However, regardless of the cause, the effects are the same. Short selling will damage your credit. It will also remain on your credit report for up to 7 years.
The exact amount of money that your credit score will drop depends on your credit history and the type of scoring system used by your credit institution, but in many cases it can be reduced by 100-150 points. Those with a higher score may initially see a greater decline.
Changes in your credit score will make it difficult to qualify for a future loan, but not impossible. However, if you qualify for the loan, you may be able to pay a higher interest rate.
Restructuring credit after short sale
Short selling can damage your credit score, so pursuing a mortgage after a short selling can be a long process with the required waiting period. If you want to buy a home in the future, you will need to repair your credit to qualify for the highest possible interest rate and loan program.
“We’re committed to providing a great opportunity to help you,” said Steve Nakash, managing director of FBC Mortgage in Denver, Colorado.
Here are some steps to help you improve your score:
- Check your credit report at AnnualCreditreport.com and fix any errors or issues you discover.
- Pay back your existing debts as much as possible.
- Don’t delay payments and keep your credit usage low. If possible, it’s less than 30%.
- Do not apply for more than two credit accounts in a short time. It is best to separate your application for several months so that your credits do not rely on multiple inquiries.
- Do not close unused credit cards. You may also consider applying for another new line of credit, but only if you pay on time and use it responsibly.
- Determine how long it takes to save for the minimum down payment you will need on your next loan and work diligently towards that goal.
- Shop for loans with at least three lenders and compare prices and terms.
Minimum waiting period for obtaining a mortgage after a short sale
The amount of time you have to wait to buy a house after a short sale will vary depending on the type of loan you have. There is a minimum waiting period before seeking a new mortgage or refinance after a short sale. Please note that these are general requirements and may vary depending on your financial situation.
| Loan type | Minimum waiting period |
|---|---|
| Traditional | With exceptions, 2-4 years |
| FHA | 3 years with exceptions |
| USDA | 3 years |
| VA | 2 years with exceptions |
| Non-qualified (other than QM) | There are no requirements |
- Traditional loans: After a short sale in just two years, you can qualify for a traditional loan, but you will need to demonstrate a “extension situation” that led to unemployment and other sales.
- I had a loan: The waiting period for short selling on FHA loans is usually 3 years. Also, if you didn’t have a previous mortgage default at the time of sale, you could apply for a mortgage without having to wait at all, and you paid on time in the year before sale.
- USDA loan: With USDA loans, even if you contribute to short sales, you will usually have to wait three years to apply for a new mortgage.
- appear: In 2 years, a VA loan has the shortest waiting period and if you make payments on time before sale, you won’t have to wait at all.
- Non-qualified mortgages (other than QM): For mortgages that are not eligible, there may be no waiting period. However, keep in mind that these loans require a larger down payment and allow you to charge a higher interest rate than other types.
Extend situations that may reduce waiting periods
Fannie May defines an expanded situation as “defining non-repetitive events that go beyond the control of violence.
If the extension situation leads to short selling, lenders may shorten the waiting period for new loans. The expansion status is as follows:
- divorce
- Death or serious illness of someone in the household (usually a major wage worker)
- Loss of employment or household income
To qualify for a reduced waiting period, you will need documentation explaining how the extension situation contributed to short sales. For example, if you suffer from a major medical event that prevents you from working, you may provide a medical report and a bill.
“Bad things can happen to good people,” says Nakash. “Bank you get bankrupt, people lose your jobs, people get sick. So it’s always wise to have six months of emergency funds on hand to get through these types of situations.”
If you are unsure whether your situation qualifies for an extension of the situation or whether you need more information about the documents you provide, contact your lender.
How to get a mortgage after a short sale
You can qualify for a new mortgage after a short sale, but that can be difficult and take longer. Mortgage fees may also be high.
“When you try to get another mortgage, you realize that lenders are more cautious,” says Nakash. “We have a history of not being able to pay now. Lenders will scrutinise their credit after a short sale to ensure new payments.”
For example, lenders typically need a minimum credit score of 680, so getting a traditional loan after a short sale can be difficult. An FHA loan requires a score of at least 580 on a 3.5% down payment.
Follow these 5 steps to get a mortgage after a short sale.
- Focus on improving your credit: Working on credit is the most important step after a short sale. This allows you to return the score to the minimum required to qualify for another mortgage. This effort should include minimizing debt balances and consistently paying all invoices on time.
- Maintaining stable income and employment: After a short sale, lenders will pay particular attention to ensuring a steady history of employment and a reliable source of income to make payments for new mortgages.
- Save enough to create a higher down payment: Coming to the table with a higher down payment for your next home will help you improve the approval odds of approval of loans after short sale. After all, the more you pay in advance, the less you will need to borrow.
- Know your waiting period: Once you know the type of loan you are applying for, you should fully find the waiting period for your particular situation in advance. You can use that time to improve your financial situation.
- Find lenders with expertise in short selling: Lenders with a solid track record of handling short sales may be more open to lending money for a new mortgage. Some lenders may even specialize in this type of loan.
Get a mortgage after a short sale FAQ
Conclusion
Remember that from you can Applying for a mortgage after a short sale doesn’t necessarily mean you should. Short sales can significantly damage your credit. There is almost certainly a waiting period before you are allowed to apply for another mortgage. It is wise to spend this time restructuring your credit score and verifying that you can demonstrate financial stability.
