How Soon Can I Buy Another Home After Short Sale?
Losing your home to a short sale can be a setback, but it does not mean that you have to give up on your dream of home ownership indefinitely.
A short sale occurs when a homeowner decides to sell their home below what they still owe to the mortgage company. Therefore, the debts associated with the property unpaid and the lienholder(s) must agree to accept less than what is owed. It is a way to avoid the bank repossessing the house (foreclosure). There are many reasons why someone might find him or herself in a situation where a short sale is necessary. During the recession, property values dropped dramatically in a short time, and in 2012, 22 percent of real estate transactions were foreclosures.
Although the repercussions on your credit score are not as severe as they would be in the case of a foreclosure, it is likely that you will not be able to get another mortgage just after a short sale. The waiting period, however, depends both on the type of mortgage you will be applying for, your financial circumstances and on how much you can put down as a down payment.
Lenders may also take into account “extenuating circumstances” that may have led to the short sale, which will reduce the waiting period. Those circumstances vary, but common ones include:
- Death, illness or injury of the primary breadwinner
- Involuntary loss of a job
- Divorce (if the household income is affected)
FHA loans are a popular option among home buyers as they usually require a lower down payment. However, the property needs to satisfy the lender’s requirements.
You typically need to wait three years after the date of the short sale to apply for an FHA loan. If you can prove that you faced some extenuating circumstances, your lender may agree to shorten the waiting period.
In some circumstances, you will not need to wait to apply for an FHA loan. There is no waiting period if:
- You were not in default on your mortgage
- You made payments on time for the past 12 months
You will not be approved for new FHA loan if you are merely trying to take advantage of the short sale process to take advantage of a declining market and are trying to buy a similar, lower priced house.
Veteran Affairs loans do not have a required waiting period to apply after a short sale. However, lenders typically recommend waiting for two years. If the borrower defaulted on a federal loan like FHA or USDA, he or she may have to wait for three years before buying another house.
Government-backed loans (aka conforming loans)
The typical waiting period to apply for a loan backed by government agencies, like Fannie Mae or Freddie Mac, also known as conforming loans, is four years with a 10 percent down payment. However, that period may be shortened to two years in case of extenuating circumstances or if the borrower puts down 20 percent. Borrowers with a down payment lower than 10 percent will have to wait seven years before applying for a conforming loan.
The rules to buy another home after a short sale vary depending on the lender for conventional mortgages. Most of them follow Fannie Mae’s guidelines for post-short sale mortgages and may be more lenient for borrowers with high down payments (25 percent or more) or who agree to a higher interest rate.