The dream of homeownership doesn't have to end when you sell your home through a short sale. Underwater homeowners, who sell their homes for less than what they owe, can qualify for a home loan again.
They'll need persistence and strong credit discipline, says Jennifer Lusk, a California resident who sold her home through a short sale in 2010 and last year was able to get a mortgage to buy another home.
Lusk had to sell her home through short sale after her husband had a back injury and they could no longer afford their $2,500 monthly mortgage payments.
Her second try at homeownership didn't happen overnight.
"We checked on what the laws were for purchasing after a short sale and learned that our credit had to be high enough if we wanted to do a conventional loan and that we had to wait two years from the closing date," she says.
Today, the couple lives in a "beautiful home" in Terra Bella, Calif. Their monthly mortgage payment is less than $900.
In today's tight lending environment, many homeowners tend to think it's nearly impossible to qualify for a mortgage after a short sale, says Scott Schang, manager at Broadview Mortgage Katella in Orange, Calif.
"After a short sale, there is a light at the end of the tunnel, and it's not far away," Schang says.
Minimum Requirements to Get a Mortgage After a Short Sale
Short sellers normally have to wait at least two years after closing the short sale to qualify for a mortgage. But the time frame and requirements vary depending on the type of the loan and the down payment, Schang says.
The minimum wait period and down payment requirements to get a conventional loan after a short sale are:
- Two-year wait with a 20% down payment.
- Four-year wait with a 10% down payment.
- Seven-year wait with less than 10% down payment.
For Federal Housing Administration loans, there's a three-year waiting period from the short sale closing date, and homebuyers can get a mortgage with as low as 3.5% down. Those who qualify for a Veterans Affairs loan have to wait two years and are not required to make a down payment.
FHA is the shortest route for buyers with less than 10% down, Schang says.
"After the waiting period, borrowers can qualify for the same FHA loan as the person who never had a foreclosure or short sale," Schang says.
But many lenders may want to know the circumstances under which the homeowner opted for a short sale, says Julie Flatland, vice president of credit at Carrington Mortgage Services in Santa Ana, Calif.
Take two borrowers: one who had to short sell because of a job transfer, and another who chose to do a short sale to dump an underwater mortgage. Lenders often view the first buyer, who did a short sale because of a job transfer, as less of a risk, Flatland says.
"As a lender, we want to make sure the borrower is not taking advantage of the declining market," Flatland says. "So we're going to ask for documentation showing that they really had no alternative other than short sale."
Rebuilding Credit After a Short Sale
Lenders generally require a FICO credit score of at least 680 for conventional loans, Flatland says. Borrowers should regard the waiting period as a chance to rebuild credit, she says.
And that's exactly what Lusk did. After the short sale, she and her husband worked to improve their credit scores and financial situation, while they waited to become eligible for a conventional mortgage.
"During that time we lived very simply," Lusk says. "We paid off all of our debt and we started saving up for a down payment. We just never wanted to be house-poor again."
The effort paid off. The Lusks saved enough for a 20% down payment and were able to get a 30-year fixed-rate mortgage at 3.5%, which is an attractive interest rate.
Before Lusk was able to get her loan approved, she had to overcome an obstacle that many short sellers encounter when they apply for a mortgage. Her servicer had incorrectly reported her short sale as a foreclosure to the credit bureaus, and the error had to be fixed. Buyers with foreclosures on their records must wait seven years before they can qualify for conventional mortgages.
"This is a really common challenge that happens with short sales," Schang says. "The credit bureaus don't report the short sale correctly, and if a lender doesn't know this, the loan ends up declined."
Inaccurate credit reports are why short sellers must get and keep proper documentation from the lender at the time the short sale papers are signed, says Dan Klinger, president of K. Hovnanian American Mortgage & Title Co.
"Find out when your short sale date was and when the title went from your name to the buyer," he says. "Keep good records, and keep your eye on the calendar because your homebuying future is still out there."