How Long After a Short Sale Until I Can Buy a Home Again?
You can buy a house the day after your short sale closes -- if you have the cash. Unfortunately, few home buyers are lucky enough to land a sudden windfall and must rely on mortgage finance to buy their next home. Loans can be hard to come by. Short sales raise a lot of questions from lenders who assume, often incorrectly, that you are a credit risk. Some lenders won't touch you for a full seven years after a major derogatory event like a short sale. Luckily, there are things you can do to qualify for a new loan in just a few months, subject to certain conditions.
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Loan options for buying a house after a short sale
First let's take a look at the various loan options available to you after a short sale.
- FHA Loans: The FHA will back loans THREE YEARS after the short sale date. You cannot apply until the three-year waiting period ends and you must have re-established your credit in the meantime. For 2015 loans, the FHA requires a 640 minimum credit score.
- VA Loans: You may apply for a VA loan TWO YEARS after a short sale as long as you meet the VA's eligibility criteria. Restrictions apply if the loan you short sold was also a VA loan.
- USDA Rural Loans: USDA does not publish any hard-and-fast rules but generally, if you had big financial issues, USDA will treat the short sale as a foreclosure and make you wait at least THREE YEARS before issuing a new loan.
- Conventional Loans: Fannie Mae and Freddie Mac have a waiting period of FOUR YEARS from date your name is removed from the title or SEVEN YEARS if you put down less than 10% on your new loan. You'll need a credit score of at least 620 and you almost certainly will have to pay private mortgage insurance on top of your monthly mortgage payment.
At first glance these waiting periods look disheartening. The good news is, they're not set in stone. If you were current on your loan when your short sale completed, were forced to sell short through no fault of your own and have worked hard in the meantime to rebuild your credit, the waiting period could shrink -- quite substantially in some cases.
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Factors that could reduce your waiting period
Several factors increase your chances of securing a home loan before the benchmark waiting period is up. These include:
- Extenuating circumstances: if you were forced to short sell your home through no fault of your own, lenders may be more willing to give you finance. Extenuating circumstances include the loss of a job, death of a primary wage earner and the payment of catastrophic medical bills not covered by insurance. Divorce does not usually count as an extenuating circumstance unless it is accompanied by a large and unavoidable drop in your household income.
- You've saved a large down payment. Conventional lenders may be willing to overlook your short sale if you make a down payment of 30% or more. Some lenders may offer you a loan with 20% down as long as you have significant cash reserves. Generally, the more you put down the lower your interest rate will be.
- You've rebuilt a high credit score. USDA, for example, will make a judgment call on loans to borrowers with scores above 640, even if they have short sold a property within the past year.
Both Fannie Mae, the FHA and the VA have shown themselves willing to overlook short sale waiting periods where some or all of these mitigating factors apply. In fact, under its flagship Back to Work scheme, the FHA is willing to back loans for Nevada borrowers who have completed a short sale with no waiting period, as long as:
- you suffered an economic event (the FHA's language for an extenuating circumstance) that resulted in a loss of employment or loss of income; and
- the extenuating circumstance caused your household income to fall by 20% or more for a period of at least 6 months; and
- these factors made it difficult for you to keep making payments on your mortgage; and
- you have re-established your credit and satisfied any loan amount owed on the mortgage you short sold on.
Some VA lenders will consider your loan application as little as one month after a short sale if you have not been late on any mortgage payments before the short sale closing date and you have rebuilt a credit score of 660 or above.
Rebuilding your credit score is easier than you might think
Now for some really good news -- rebuilding your credit score may not be as difficult as you might think. Fair Isaacs, the company behind your FICO credit score, have recently lessened the impact a short sale has on your credit score. In fact, closing a short sale might actually boost your credit score on the day it is posted to your report. That's because a delinquency on your mortgage is reported as 60, 90 or 120+ days past due payment. A past due notice tells mortgage lenders that you are a poor payer, and therefore a risky borrower, and can knock as much as 90 to 110 points off your FICO score. A short sale, on the other hand, is generally reported as "account settled for less than originally agreed" or simply "settled" on your credit report. Some lenders don't report it at all. In many cases, this is preferable to a past due notice, especially if the lender does not report a deficiency balance to the credit agencies.
The key takeaway is this: act to clear up the issues that make you look like a higher risk to lenders and you should qualify for a mortgage. Begin looking at your credit at least six months before you are ready to buy again, pay your bills on time and save hard for a down payment, and it may be possible to purchase a home in as little as 12 months. Do nothing, and your short sale could put an end to your home ownership dreams for good.
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