We lost our home to foreclosure two years ago. Are there any mortgage programs that can get us back into home ownership? – David M.
Buying A House After A Short Sale Can Be Done
If you have been in a position that you needed to sell your home through a short sale, and you are wondering if you will be able to buy another home again, we have good news, homeownership dreams don’t need to end after short selling a home.
What is the waiting period after a short sale?
The short sale waiting periods are determined by the nature of the financial hardship you had and the type of mortgage you are applying for. In general, government-backed mortgages are more forgiving than conventional home loan guidelines. If you had an extenuating circumstance, you may be able to buy sooner than if it was a strategic short sale.
However, there are some “non-prime” programs that can approve you one day out of foreclosure if you make a substantial down payment and pay a higher mortgage rate.
What is an extenuating circumstance?
In simple terms, it is a situation that was beyond your control that caused you to default on your mortgage payments. There are some loan types that allow shorter waiting periods for “extenuating circumstances.” A medical emergency, job loss, or death of a borrower are examples of potential extenuating circumstances. A divorce, a drop in equity, or the inability to sell your home would not be approved as an extenuating circumstance. They are hardships that would be approved for the short sale of a home, but when qualifying for a new mortgage they are not considered “beyond your control.”
The loan underwriter will evaluate your situation and make the final judgment call. The lender that is handling your new mortgage needs to present the case that the foreclosure was due to an event that had nothing to do with your lifestyle or choices, and despite your best efforts, you lost the home.
FHA Mortgage After a Short Sale
- 3 Years from a Short Sale or Deed in Lieu
FHA requires that at least three years have passed from the date of the short sale through before getting a new mortgage. Under certain extenuating circumstances, it is possible to buy with less than three years. Extenuating circumstances are situations beyond the borrower’s control such as serious illness or death of a wage earner. FHA specifically mentions that divorce or job relocation are not extenuating. You must have documented proof of the extenuating circumstances in order to take advantage of them.
In August of 2013, FHA guidelines were amended to shorten the waiting period for borrowers who experienced a financial hardship and their household income dropped 20 percent or more for at least six months. For borrowers that experience this type of documented income loss, FHA will allow a new loan after 12 months. In order to be approved, the borrower must document their hardship and complete one hour of HUD housing counseling.
There is also a divorce exception. It requires that the mortgage was current at the time of the divorce, the ex-spouse received the property, and there was a short sale after the divorce was completed. In this situation, the borrower that released their interest in the property had no control over the property and decision to short sell.
Appropriate documentation must be provided to prove the time-lapse, circumstances, and re-established credit score.
FHA: “No waiting period”
There is one exception in which FHA allows homebuyers to apply for a mortgage immediately after a short sale. FHA’s “no waiting period” has a very strict caveat.
There may be no waiting period if:
- You were not in default on the prior mortgage at the time of the short sale, and
- In the 12 months prior to the short sale, you made your mortgage payments on time.
In most situations, lenders require that you are in default in order to get your short sale approved. If, you were able to keep the payments current, this program would apply to you. If you had any missed payment, FHA will require a three-year waiting period that is described above.
Conventional Loan After A Short Sale
- 4 Years from a Short Sale or Deed in Lieu
- 2 Years from a Short Sale or Deed in Lieu with Extenuating Circumstances
Waiting periods for both Fannie Mae or Freddie Mac backed loans vary depending on circumstances. Both require a 4-year waiting period, but will allow for a lesser waiting period with applicable, documented extenuating circumstances. With an accepted extenuating circumstance, there is a two-year waiting period and a 10% down payment requirement.
For a Fannie Mae loan, “extenuating circumstances” are situations which (1) occur one-time only; (2) are beyond the borrower’s control; and, (3) result in a sudden, significant, and prolonged reduction in income. The label of “extenuating circumstances” may also be applied to situations in which a borrower is subject to a catastrophic increase in financial obligations.
Examples of extenuating circumstances may include divorce, illness, sudden loss of household income, and/or job loss.
If you wish to apply for a loan using Fannie Mae’s Extenuating Circumstances program, you should be prepared to provide the lender documentation in support of the claim. Valid documentation may include a copy of a divorce decree; medical bills; and, a notice of job loss or job severance papers. You will also be required to provide the lender a letter explaining the hardship and how it led to the short sale. The letter needs to clearly state that it was a one-time event, and it was the only reasonable course of action at the time.
VA Loan After A Short Sale
- 2 Years from a Short Sale or Deed in Lieu
The typical waiting period after a short sale is two years for a VA loan with proof of a re-established credit score. But, the VA does not have a strict guideline for a waiting period, or seasoning period, after a short sale and you may be able to obtain a loan soon.
Similar to an FHA loan, extenuating circumstances are allowed for reasons that are “beyond the control” of the borrower if properly documented.
If the loan that you completed the short sale on was a VA loan, you may not have any additional VA entitlement left. VA entitlement will not be restored if your original VA loan was not repaid in full. You can learn more about a VA Compromised Sale here.
If you defaulted on a federal debt, such as an FHA or USDA loan, the waiting period will be increased to three years until you’re able to apply for a VA loan.
Jumbo Loan After A Short Sale
- 4 Years from a Short Sale or Deed in Lieu
Jumbo loans are loans that are above the Fannie Mae and Freddie Mac loan limits. These loans are funded by price institutions and the underwriting guidelines are going to vary widely depending on the financing institution you are working with. The 4-year requirement mentioned above is an average. You may be able to find lenders that offer a shorter time period in exchange for a higher down payment and/or interest rate.
Track Your Credit
Short sales will typically be reported on your credit report as “paid/closed with zero balance” or “settled for less than the full amount due.” It will depend on the lender and their policy.
Sometimes the lender will incorrectly report short sales. We have seen some accounts left open and one that was incorrectly reported as a foreclosure. This is why it is imperative that you check your credit report and make sure that everything is properly reported by the lender.
Rebuild your credit
Restoring your credit after a short sale includes opening new credit accounts and paying them on time for a minimum of 12 months. Keep all accounts open and pay them in full each month. If you are not able to obtain a standard credit card right after the short sale, a secured credit card is a great alternative.
You can also increase your credit score if you are added as an “authorized user” on another account. Typically this is a friend or family member that has excellent credit and is willing to add you to their account. As an authorized user, you don’t need to use their account, or even know their account info.
The more you do to rebuild your credit, the more it will help you get in a position to qualify for a mortgage and buy another home.
If you would like to buy a home after a short sale, contact us today to discuss your options and how we may be able to help.