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If you’re having trouble making mortgage payments or you’re underwater on your home, it may be possible to pursue a short sale. This process helps you avoid foreclosure by selling your home for less than the amount still owed on the loan while having the remainder forgiven. But there are drawbacks, too, including the fact that short sales can impact your ability to buy a home in the future. Here’s what to know about getting a mortgage after a short sale.
There are many reasons why you might choose to sell your home through a short sale, but no matter what the cause, the impact is the same: A short sale damages your credit. It also remains on your credit report for up to seven years.
While the exact amount your credit score declines depends on your credit history and the type of scoring system a credit agency uses, it can often drop between 100 and 150 points. Those with a higher score initially are likely to see a greater decline.
The change in your credit score will make it difficult, but not impossible, to qualify for loans in the future. In cases where you are able to qualify for a loan, you’ll likely pay a higher interest rate.
Since short sales damage your credit score, pursuing a home loan after a short sale may be a lengthy process. 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 Steve Nakash, managing director at FBC Mortgage in Denver, Colorado.
Here are some steps that can help boost your score:
How long after a short sale you must wait to buy a house depends 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 financial situation.
| Loan type | Minimum waiting period |
|---|---|
| Conventional | 2-4 years with exceptions |
| FHA | 3 years with exceptions |
| USDA | 3 years |
| VA | 2 years with exceptions |
| Non-qualifying (non-QM) | No requirement |
Fannie Mae defines extenuating circumstances as “nonrecurring events that are beyond the borrower’s control that result in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations.”
If extenuating circumstances led to your short sale, your lender might reduce your waiting period for a new loan. Extenuating circumstances may include:
To qualify for a shortened waiting period, you’ll need documentation that explains how the extenuating circumstances contributed to your short sale. For example, if you suffered a major medical event that prevented you from working, you might provide medical reports and bills.
If you’re unsure whether your situation qualifies as extenuating circumstances or need more information about which documents to provide, contact your lender.
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 Nakash. “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.”
For instance, it may be difficult to get a conventional loan after a short sale, as lenders typically require a minimum credit score of 680. FHA loans require a score of at least 580 with a 3.5 percent down payment.
Take these steps to get a mortgage after a short sale:
Yes, you may qualify for a mortgage after a short sale, depending on the loan program you select. FHA loans are worth considering for credit-challenged borrowers once the three-year waiting period following the short sale ends. You’ll need a 580 credit score and 3.5 percent down payment. If you can save up a 10 percent down payment for an FHA loan, you can apply with a minimum 500 credit score.
It’s best to notify the lender of the short sale on the application. If not, they will find out when reviewing your credit report, which could result in an automatic mortgage denial for failing to disclose this information.
Yes, lenders generally allow co-signers on mortgage loans, even if the primary borrower has a prior short sale on their credit profile. Doing so can help boost your approval odds, but keep in mind that the co-signer assumes equal responsibility for the loan without having rights to the property. In short, if you default on the payments, it becomes their responsibility to keep the loan in good standing.
If you get a new mortgage after a short sale, it’s possible to refinance at a later date. But if your credit score is still on the lower end and hasn’t fully recovered from the short sale, refinancing may not make financial sense. You could be offered less attractive terms, depending on your financial profile and market conditions.
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,” says Raisul Islam, chartered accountant and director of Hadee Lutful & Co., “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,” says Nakash.
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
