Most borrowers with a previous short sale wait two to seven years before applying for another mortgage. A short sale occurs when a borrower sells his home for less than the mortgage owed, with the lender's permission. Short sales happen when the home's value falls short of paying off the loan in full. To buy a home immediately after a short sale, you must qualify for an exception to the lender's post-short-sale waiting period.
Regardless of the circumstances surrounding a recent short sale, a new mortgage lender will require you to have good credit. A short sale hurts your credit as severely as foreclosure because you failed to repay the debt in full, according to myFICO. Borrowers with excellent credit take a bigger hit than borrowers with poor credit, according to CNNMoney. The more missed payments you had leading up to the short sale, the more severe the impact. A short sale can end up diminishing your score between 85 to 160 points. To re-establish your credit, you must make payments on time and keep balances under 30 percent of credit limits. Accounts that are 30 days late further diminish your score and disqualify you for a new mortgage under most lending standards.
Find a Lender
Certain lenders and loan programs have more flexible eligibility standards. For example, Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans, which are backed by the government, have more forgiving guidelines than conventional loans. Lenders that make government-backed loans may impose more strict standards. You have the best chance with a lender that adheres to the more forgiving rules, such as an FHA lender that follows the agency's 580 benchmark score, whereas most require a 640. The VA doesn't have a minimum score requirement, but lenders usually want a 620. Finding a lender who will consider your specific situation may entail visiting three or more lenders in person or collaborating with a one-stop-shop mortgage broker that works with multiple lenders.
Explain Your Situation
Once you have a lender who is willing to hear you out, you have to prove that the short sale was a one-time occurrence. Lenders can make an exception for a borrower that proves extenuating circumstances led to the short sale. Extenuating circumstances are beyond the borrower's control and highly unlikely to occur again. For example, the death, serious illness or permanent disability of a borrower or co-borrower on the previous loan may qualify as extenuating. You must write a letter of explanation detailing the series of events that forced you to sell the home and be ready to back it up with supporting documents.
Put your best foot forward by showing the lender that you have carefully managed your money since the short sale. You need a down payment of at least 3.5 percent for an FHA loan and 5 percent to 20 percent for a conventional loan. The lender may also require you to pay for the down payment with your own funds, rather than with money gifted by a relative. Lenders may require you to meet all other qualifying criteria without affording you the wiggle room they might for borrowers without a recent short sale. Be prepared to show assets of two or more months worth of housing payments as reserves. Your debt load must be on the low end as well, at about 30 percent of your gross income.
- Bankrate.com: Can I Get A Home Loan After A Short Sale?
- My FICO: Are the Alternatives to Foreclosure Any Better As Far As My FICO Score is Concerned?
- CNN Money: How Foreclosure Impact Your Credit Score
- Mortgage Professor: How Forgiving Is the Mortgage System?
- Veterans United: Two Credit Score Facts That Should Make You Appreciate VA Loans
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.