Good intentions make a difference, according to lenders that help buyers secure mortgage financing after they have gone through a short sale. Lenders are increasingly looking beyond credit scores to determine a borrower’s willingness-to-pay. This becomes increasingly important when looking at borrowers who have gone through a short sale.
Strategic short sales have become common for homeowners whose mortgage balance is far higher than their property’s value. Strategic short sales make financial sense when the gap between the mortgage and the property value (called the deficiency) is large and the borrower is not at risk of a deficiency judgment on their other assets or income. Two states, California and Oregon, have laws banning lenders from seeking deficiency judgments beyond the property itself. In other states, protection from a deficiency judgment must be negotiated as part of the short sale.
When considering whether to approve you for a new mortgage, lenders want to know whether your short sale was due to unavoidable hardship or if you are just taking advantage of a falling market. Your motivation and the circumstances surrounding your short sale will be considered (as well as your credit score) when lenders weigh your commitment to making your mortgage payments.
Going through a short sale rather than a foreclosure will usually be less damaging to your credit score. It may also be possible for you to rebuild your credit to acceptable levels for a new mortgage more quickly. In addition to restoring your credit, there are minimum waiting periods after a short sale before you will be considered for a new mortgage.
Waiting Periods For Major Loan Programs
- Conventional Fannie Mae or Freddie Mac loan with 20% down – 2 years.
- Conventional Fannie Mae or Freddie Mac loan with 10% down – 4 years.
- Conventional Fannie Mae or Freddie Mac loan with less than 10% down – 7 years.
- FHA loan with 3.5% down – 3 years.
- FHA Back To Work Program loan with 3.5% down (documented job loss) – 1 year.
- VA loan with 0.0% down (with no late payments) – 0 years.
- VA loan with 0.0% down (late payments leading up to short sale) – 2 years.
How to Prepare
The basics of building good credit also apply to preparing to qualify for a mortgage after a short sale. Live below your means, use credit responsibly, pay your bills on time, and save money for a down payment.
There are some specific things you should check to make sure your credit report reflects your status accurately. Request your free annual credit report from all 3 credit reporting agencies and check for obvious errors. Specifically check to see that the short sale was recorded properly and not as a foreclosure. The waiting period after a foreclosure is typically much longer.
If your short sale was due to legitimate hardship such as a transfer, loss of a job or major medical condition, collect documentation for your lender to submit with their application. Making a good case for a temporary hardship that is now behind you will be a big plus when you apply for a new mortgage.