Can I get a mortgage after a short sale of my home?

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.

The impact of a short sale on your credit

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.

Rebuilding credit after a short sale

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:

• Review your credit report at AnnualCreditReport.com, and correct any errors or problems you spot.
• Pay off your existing debt as best you can.
• Avoid making late payments and keep your credit utilization low — below 30 percent if possible.
• Avoid applying for two or more credit accounts in a short time. It’s best to separate your applications by a few months so that your credit isn’t dinged by multiple inquiries.
• Don’t close unused credit cards. You can also consider applying for other new lines of credit, but only if you intend to make payments on time and use them responsibly.
• Determine how long it will take you to save up for the minimum down payment needed on your next loan and work diligently toward that goal.
• Shop around for loans with at least three lenders, and compare rates and terms.

Minimum waiting period to get a mortgage after a short sale

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.

• Conventional loan – You could qualify for a conventional loan after a short sale in as little as two years, but you’ll likely need to demonstrate “extenuating circumstances” that led to the sale, such as job loss.
• FHA loan – The short sale waiting period on FHA loans is typically three years, unless you can prove extenuating circumstances, which could shorten the wait to one year. You may also be able to apply for a mortgage with no wait whatsoever if you weren’t in default on your prior mortgage at the time of sale, and you paid it on time in the year before the sale.
• USDA loan – With a USDA loan, you’ll generally have to wait three years to apply for a new mortgage, even if extenuating circumstances contributed to the short sale.
• VA loan – At two years, VA loans have the shortest waiting period, and there may even be no wait at all if you made payments on time before the sale.
• Non-qualifying mortgage (non-QM) – For a non-qualifying mortgage, there may be no waiting period, but keep in mind that these loans can require a larger down payment and charge higher interest rates than other loans.

Extenuating circumstances that might shorten the waiting period for a loan after a short sale

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:

• Divorce
• Death or serious illness of someone in the household (typically the main wage earner)
• Loss of employment or household income

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.

How to get a mortgage after a short sale

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:

1. Focus on improving your credit. Working on your credit is the most important step after a short sale so that you can get your score back up to the minimum needed to qualify for another mortgage. This effort should include keeping debt balances to a minimum, paying all bills on time consistently and monitoring your credit report for errors.
2. Save a higher down payment. It’s also a good idea to come to the table with a higher down payment for your next home. This can help improve your approval odds for a home loan after a short sale.
3. Research short sale waiting periods. If you hope to apply for an FHA loan, find out what the short sale waiting period is for this loan type. There are also waiting periods for conventional loans after a short sale, as well as VA and USDA loans. Find out well in advance of when you’re eligible to apply, and use that time to improve your financial picture.

Getting a mortgage after a short sale FAQ

• Can I get a mortgage with a low credit score 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.
  

• Should I disclose my previous short sale when applying for a new mortgage?

  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.
  

• Can I use a co-signer to help me qualify for a mortgage after a short sale?

  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.
  

• Can I refinance my mortgage after a short sale?

  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.
  

Bottom line

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.