Financially distressed homeowners can eliminate the burden of an unaffordable mortgage through a short sale. In a short-sale transaction, a homeowner must persuade his lender to settle for a payoff amount short of the mortgage balance due. Some homeowners do a short sale with the expectation of buying again. You can buy immediately after a short sale if you can afford to buy without financing or with minimal financing. Otherwise, lenders make you wait several years, in most cases.
A Typical Time Frame
Mortgage lenders restrict borrowers from buying too quickly after a short sale to protect their own financial interests. In general, you must wait between two and seven years before you buy another house after a short sale. Whether you can buy again after waiting the required time depends on your financial and credit management in the interim. A new lender requires you to re-establish good credit, recover from financial hardship and meet all other standard requirements, such as sufficient income and assets.
Changes to Waiting Periods
Lenders modify waiting periods occasionally, based on the housing market and their risk management needs. They might shorten a previous waiting period to increase the amount of eligible borrowers, but otherwise set more stringent guidelines for these borrowers to meet. They also may have different waiting periods for borrowers based on the down payment. For example, conventional lenders may finance a borrower two years after a short sale if the borrower has 20 percent down. The same lender may require you to wait four years if you only have 10 percent down and seven years if you have a smaller down payment.
Federal Housing Administration Flexibility
As of the time of publication, the FHA relaxed its traditional three-year waiting period for borrowers who proved that extenuating circumstances caused their short sale. If borrowers prove that over a 12-month period they fully recovered from financial hardship, an FHA lender could approve a new loan. The FHA insures loans funded by participating lenders, protecting them against default. Borrowers must prove, via documentation, that an unavoidable economic event, such as a job loss, loss of income, or both events combined, caused the short sale. They also must prove they lost 20 percent of their income over a six-month period and complete at least one hour of homebuyer education. You must check with an FHA-approved lender to get the most recent guidelines.
The FHA allows you to buy a home without waiting if you had a short sale without missed payments. You can qualify if you were current at the time of short sale and met all other installment debt obligations for 12 months before the short sale. You might also forgo waiting requirements if you can buy a home in cash or obtain a private loan, or hard-money loan. A hard-money loan requires a 30 percent to 50 percent down payment and carries a high interest rate.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.