If you have lost your home through a short sale and want to get another mortgage loan, you may be wondering how long you'll have to wait. Your credit will take a hit after a short sale, although possibly not as much as it would if you had lost your home through foreclosure. Nevertheless, a short sale will likely prevent you from getting another mortgage right away. The amount of time you must wait before applying for a new mortgage loan depends on the type of lender and your financial circumstances. Read on to learn more.
(To learn about short sales, see our Short Sales and Deeds in Lieu of Foreclosure topic area.)
(For more articles on rebuilding credit after foreclosure, visit our Improving Credit After Foreclosure and Bankruptcy topic area.)
Getting an FHA Loan After a Short Sale
The amount of time you must wait to obtain a new FHA mortgage varies, depending on your credit history and the reasons for the short sale.
No Waiting Period
You may not have to wait to apply for a FHA-insured mortgage loan following the short sale if:
you were not in default on the prior mortgage at the time of the short sale, and
you made all of your old mortgage and other installment debt payments on time for at least 12 months leading up to the short sale.
Three Year Waiting Period
If you were in default on the old mortgage loan at the time of the short sale, then you must wait at least three years before applying for another FHA loan. The three-year waiting period starts to run from:
the date of the short sale, or
if the prior mortgage was also an FHA-insured loan, from the date that FHA paid the claim on the short sale.
Exceptions to the Three Year Waiting Period
You may be able to qualify sooner than three years if you can show that extenuating circumstances caused the mortgage default. Extenuating circumstances might include:
serious illness or death in the family, usually involving a primary wage earner
divorce (in limited situations), or
You must also show that you had good credit prior to the event that caused you to default on the old mortgage. That means you should make all of your debt payments on time following the short sale.
When You Will Not Be Eligible for a New FHA Loan
Notwithstanding whether or not you defaulted on the old mortgage loan, you are not eligible for a new FHA loan if you were using the short sale simply to take advantage of cheaper housing prices. That means you cannot use the short sale as a way to get rid your old house in a declining housing market and buy a comparable house for a lower price.
Getting an Fannie Mae/Freddie Mac Loan After Short Sale
Waiting periods for a Fannie Mae or Freddie Mac mortgage loan following a short sale vary, depending on the circumstances. It depends in large part on how much money you are able to put down as a down payment. Your waiting period will be:
two years, if the maximum loan-to-value (LTV) ratio of the loan is 80%
four years, if the maximum LTV is 90%
seven years, if the LTV ratio falls within Fannie Mae's eligibility matrix (see, https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf).
In other words, you'll have to make a 20% down payment to wait two years, 10% down payment to wait four years, or the minimum down payment if you wait seven years.
Exceptions to the Normal Waiting Periods
You may be able to shorten the waiting period to two years for a Fannie or Freddie loan if you can also meet the following requirements:
prove in writing that the short sale was the result of extenuating circumstances, and
the maximum loan-to-value (LTV) ratio of the new mortgage is 90%.
Also, the seven-year waiting period only applies to conventional loans that are sold to Fannie Mae or Freddie Mac. This rule does not apply to Fannie or Freddie loans that are FHA-insured.
Conventional, Private Lenders
For most other types of lenders, the waiting periods can vary. Most lenders tend to follow Fannie Mae's guidelines for post-short sale mortgages. Other lenders may shorten the post-short sale waiting period, provided that you make a larger down payment (sometimes 25% or more) and agree to a higher interest rate. You will also need to have good credit.
Your FICO Score
Notwithstanding the waiting periods, for each type of lender, you must still establish good credit following the short sale. That means your FICO score must meet the lender's minimal requirements to qualify for a post-short sale mortgage loan. Alternatively, while you may be able to obtain a new mortgage with a low FICO score, you may have to make a larger down payment or pay a higher interest rate.
Short sales can damage FICO scores. And the higher your credit score, the bigger the FICO drop with a short sale. You may fare slightly better if the short sale resulted in no deficiency (meaning you sold the house for more than what you owed on the mortgage loan) than if the short sale did result in a deficiency. To learn more see, FICO Provides Insight Into the Impact of Foreclosure, Bankruptcy, and Short-Sale on Your FICO Score.
To re-establish good credit and boost your FICO score, you should:
always pay your bills on time
keep your credit account balances low
monitor your credit report for errors and inaccuracies, and
maintain a small number of credit accounts.
Monitor and Correct Your Credit Report
It is essential that you review your credit report immediately if you anticipate applying for a new mortgage following a short sale. That is because short sales are frequently reported as “foreclosures” on credit reports. If your short sale is reported as a foreclosure on your credit report, you may be erroneously denied a new mortgage loan because:
your FICO score is lower than it should be (foreclosures are more damaging to FICO scores than short sales)
the lender mistakenly applied a longer post-foreclosure waiting period against you when you would have otherwise qualified, or
the lender required you to make a higher down payment than what you would have been required to make if the short sale were properly reported.
(To learn about the impact of foreclosure on your ability to get a new mortgage, see When Can I Get a Mortgage After Foreclosure?)
You should contact all three major credit reporting agencies to correct the error and be prepared to supply documentation of the short sale to your lender.
For more information on how to correct your credit report, visit Nolo's Credit Repair section.