Obtaining a mortgage after a short sale can be challenging. When you sell your home for less than the amount that you owe on it, your lender takes a loss on the difference. Now, mortgage companies may consider you a higher risk than other borrowers. Waiting two years to apply for a new loan can help you qualify for another mortgage, but there's no guarantee that you will be approved or receive the best terms.
A short sale cannot be finalized without the approval of your lender. When the economy is down, many mortgage companies agree to a repayment of less than the balance on your note. In addition, lenders usually do not attempt to collect the difference after the transaction closes; and the IRS may waive any taxes due on the same amount. However, you must qualify with a financial hardship and, by that time, you may have missed some payments, which lowered your credit rating. Your credit score can drop anywhere from 85 to 300 points or more, depending on how the short sale is reported to the credit bureaus and what your score was before the transaction.
In the conventional secondary mortgage market, where government-sponsored Fannie Mae and Freddie Mac buy mortgages from lenders and sell them as securities, the qualifications to apply for a loan after a short sale differ slightly. Fannie Mae requires you to wait for two years and place 20 percent down before applying for a mortgage after a short sale. After four years, you can use 10 percent for a down payment, unless the short sale was due to financial hardships outside of your control, such as medical problems or a layoff. Then you can put 10 percent down after only two years. For Freddie Mac, you will have to wait four years after a short sale, unless you have extenuating circumstances. Then you can apply after two years.
Federal Housing Administration
The Federal Housing Administration (FHA) insures loans against default, which encourages lenders to underwrite mortgages with smaller down payments. FHA rules allow borrowers to apply for another mortgage directly after a short sale if they meet certain criteria. Your short sale must have been due to reasons that you could not control and not because it was a depreciating market or you wanted to buy the same or better property closer to work. Also, your mortgage and all other debt must have been paid on time in the past 12 months. If you were in default on your loan at the time of the short sale, you will have to wait three years to qualify for an FHA loan.
If you were in default on your mortgage and you don't want to wait to apply for a new loan, you can inquire about seller financing on properties that sellers own outright. When the market is slow, they might agree to carry the note. You may have to pay a higher interest rate and take a shorter term to encourage you to refinance after a few years. Explain the reasons behind your short sale and have the seller check your credit to prove, overall, that you have a history of being a good financial risk with debts paid on time, except for the recent past.
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