Stuck in Mortgage Limbo After Doing a Short Sale

Dear Dr. Don,

We were forced to do a short sale with our home due to a huge salary cut. Our credit rating beforehand was great, but the mortgage holder required us to fall two months behind on our payments before they would allow the short sale. Of course, that hurt our credit score. We would like to buy again but struggle to save much beyond our rent for a down payment. Are there mortgages available after a short sale that don't require a 20% down payment, and will we be able to get a conventional mortgage after the short sale?

- Brian Bungalow

Dear Brian,

Not all lenders require you to be past due on your payments to qualify for a short sale. Your lender did, so you have to work within that constraint. The good news is you successfully navigated the labyrinth that is a short sale, and you made it to the other side.

I'm sure you'd like a second chance at buying a home in today's market with today's low interest rates. Unfortunately, you must spend some time in the penalty box before lenders will once again consider you for a conventional mortgage or even a mortgage through the Federal Housing Administration, or FHA.

In general, you'll have to wait two to four years to qualify for a conventional mortgage that meets the standards of Fannie Mae or Freddie Mac, which buy mortgages on the secondary market, pool them and sell them as mortgage-backed securities to investors on the open market.

The shorter end of the wait period is for borrowers with 20% down or who faced extenuating circumstances in the short sale of their last home. The longer end of the wait period is for borrowers who can put 10% down. In both cases, the borrower needs a traditional credit history that isn't a "thin file," or a limited or short credit history.

FHA loans have lower down-payment requirements -- 3.5%. Borrowers who weren't in default when they closed on the short sale can get an FHA loan right away. Borrowers who were in default have to wait three years, although lenders can make a case for extenuating circumstances.

Can't wait out the time in the penalty box? If you're open to some creative financing, you might be able to negotiate a lease option on a rental home you'd consider owning. What's interesting about the lease option versus a lease-purchase agreement is the opportunity to back away if you don't like what happens to the home's value over time.

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