If your mortgage payments are too much for your budget to handle, a short sale is one way to relieve some of the financial pressure. Executing a short sale is generally considered a better alternative to a deed in lieu or a foreclosure but it’s not a risk-free solution.
Your credit is likely to take a few bumps and bruises which can present a challenge if you decide to buy another home later on. Getting a mortgage after a short sale isn’t impossible but it requires some effort and planning.
How a Short Sale Works
A short sale just means that the bank agrees to let you sell your home for less than what’s owed on the mortgage.
Generally, you can only get approved for this kind of deal when you’re not financially able to sustain the monthly payments. You’ll need to be able to prove an ongoing hardship by submitting copies of your tax returns, pay stubs and a list of your expenses along with a general financial statement.
What It Means for Your Credit
When you go through a short sale you can’t expect your credit to get off scot-free. It’s inevitable that your score will lose a few points along the way, but just how many depends on how good your credit was prior to the short sale and whether or not the lender expects you to pay anything else towards the loan.
Interestingly, homeowners who have a credit score that’s on the higher end of the scale stand to lose more points than those who just have average credit. For example, FICO estimates that someone with a 780 score would see it drop by as much as 160 points after a short sale while someone with a 680 score would see a 105 point loss at the most.
The worst score drops come when you complete a short sale with a deficiency balance. Unless you specifically ask your lender to waive any amount that’s still due on the mortgage once the home is sold, you’re going to be held responsible for it. If you don’t pay, the lender can report any late or missed payments to your credit which would send your score spiraling downward even further.
When Can You Get a Mortgage After a Short Sale?
Lenders want to see that you’re financially stable when approving you for a mortgage and for that reason, there are mandatory waiting periods that you have to observe following a short sale. The waiting period varies based on what type of loan you’re trying to get but generally, here’s what you can expect:
- Conventional loan – 4 years
- FHA loan – 3 years
- USDA or VA loan – 2 years
In the case of a conventional loan, you may be able to cut the wait time in half if you can show that there were extenuating circumstances that resulted in the short sale. Generally, this refers to something that occurred on a one-time basis and was outside of your control, such as a job loss or an unexpected illness.
It’s also possible to shorten the wait to one year if you’re considering an FHA loan. The Federal Housing Administration’s Back to Work program is designed for homebuyers who lost their homes because of an extended period of employment but who have since recovered and are on the job once again. You’ll need to bring a minimum of 3.5 percent down to the table to qualify.
What You Can Do in the Meantime
While you’re sitting on the bench during the waiting period, the last thing you want to do is twiddle your thumbs. Instead, you should be using this time to make yourself as attractive as possible to lenders so that when you’re finally able to apply for a mortgage, getting approved will be a lock.
So what does that mean, exactly? For starters, you should be working on undoing some of the damage the short sale caused to your credit score. The easiest way to do that is to pay your bills on time each month, with no exceptions. Your payment history is the most important factor that shapes your FICO score.
Next, you’d want to work on paying down any debts you have and avoid taking on any new debt. Ideally, you want to keep your debt to income ratio at around 30 percent or less since anything above this level would drag down your credit score.
Finally, you’d want to work on building up some savings ahead of your new home purchase. A 20 percent down payment is par for the course, unless you’re planning on taking out an FHA loan. Beyond the down payment, you’ll also need to sock away some cash towards the closing costs. As long as you’re covering all of these bases, you’re putting yourself in the best position possible to get back in the home ownership game.
In doing a short sale, our existing home was under MY name only. My wife was able to purchase a replacement home immediately ( less than two weeks) under HER name only without too much adverse action to her credit.
We did have to give some documentation to prove that the short sale got attributed to me only but it did work. We also were separated (not legally though) and lived in different residences upon (and due to) losing the first home. I did not move into the new home but it was very helpful in keeping our children in the same school district and keeping my wife and children from being homeless.
Thought this might be something helpful for your clients and blog readers to be aware of as another option if their circumstances are similar.
my short sale has been on my credit report for 6 yrs 8 months what can I do