Bill Rapp here with Heartfelt & Hot in Houston Blog, here is our newest segment: Sold your home via short sale? You can buy again now!
If you owned a home between 2006 and 2011, there’s a good chance that you saw your home’s value sour from all-time highs to all-time lows. In 2012 alone, short sales accounted for 22 percent of all home transactions.
By 2010, almost one-quarter of U.S. homeowners had underwater mortgages, with balances exceeding their property values. But many of those homeowners are venturing out into the home buying arena. Fortunately, homeownership dreams don’t have to end when you sell your home through a short sale.
What is a short sale?
A short sale is the sale of a home in which the proceeds are insufficient to repay all mortgage balances against the property.When there is more than one lienholder on the property, a first and a second mortgage, for example, it is necessary that all lienholders agree to accept less than the amount owed as payment-in-full.
A short sale can be better for homeowners than foreclosure, doing less damage to your credit score. You may be able to buy sooner after a short sale than a foreclosure.
How long after a short sale do I have to wait to buy a home?
Short sale waiting periods depend upon the type of loan you seek. In general, government-backed mortgages are more forgiving than conventional home loan guidelines. 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.
Non-QM mortgage after a short sale
Non-QM mortgage loans have flexible underwriting criteria and can be a great alternative for homebuyers. Credit qualifying requirements for non-QM loans vary, but many lenders offer non-QM loans just one day out of a short sale.
Most non-QM loan programs carry higher interest rates and require larger down payments.
FHA: “No waiting period”
FHA allows homebuyers to apply for a mortgage immediately following a short sale. It’s important to note, however, that FHA’s “no waiting period” has a few strict caveats for defining the extenuating circumstances.
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.
If your mortgage was in default at the time of the short sale, FHA requires a three-year waiting period before applying for a new home loan.
FHA mortgage after a short sale
FHA’s three year waiting period starts from:
* The date of the short sale, OR
* If the prior mortgage was also an FHA-insured loan, from the date that FHA paid the claim on the short sale.
There are exceptions to the three-year waiting period.
If you can show extenuating circumstances caused the mortgage default, you may be able to qualify sooner than the three-year period.
Examples of extenuating circumstances may include:
* Divorce (in certain cases)
* Serious illness or death of a family member, usually involving the primary wage earner, or
* Job loss, again usually involving the primary wage earner
You need written proof of extenuating circumstances to take advantage of them.
Conforming loan after a short sale
Waiting periods for a Fannie Mae or Freddie Mac mortgage vary depending on circumstances. Homebuyers with a 20 percent down payment may qualify in as few as two years following a short sale. Buyers with ten percent down face a four-year wait. Homebuyers looking to put less than ten percent down will need to wait seven years from the date of their short sale.
There are exceptions to the normal waiting periods for a conventional loan. To qualify for these exceptions, you need a minimum down payment of 10 percent, and written proof that the short sale was the result of extenuating circumstances.
What to do after a short sale
While not always as damaging as a foreclosure, a short sale may hurt your credit. It depends on what you negotiate with your lender. Some will not report it if the homeowner makes partial restitution to cover some of the lender’s losses. If the short sale is reported as a serious delinquency or derogatory item, it can stay on your record for up to seven years. There are a number of proactive measures prospective homebuyers can take prior to applying for a mortgage.
Track your credit
Short sales usually appear on your credit report as “Paid/closed with zero balance.” There may also be the notation, “settled for less than full balance.”
Sometimes banks get this wrong and report short sales inaccurately. It is imperative that your short sale is reporting to the credit bureaus accurately.
Rebuild your credit
Restoring your credit involves 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 unable to get a gas card or another small credit card, consider secured credit cards.
Secured credit cards can be a great alternative to traditional credit cards. Choose one carefully, though. Some just harvest steep fees and offer little benefit. Secured cards only rebuild credit if they report your history to credit bureaus.
You can also improve your credit score as an “authorized user.” That means you have friends or family with excellent who are willing to add you to their accounts as an authorized user.
Understand your credit score
According to a recent survey, 40 percent of consumers do not understand the importance of credit scores in making credit decisions. Your credit scores are one of the single most important factors when determining your interest rate.
There are a number of factors that make up your credit scores, such as payment history, age of accounts, types of accounts and number of credit inquiries.
In addition to all of these, it’s important to understand the importance of credit usage. For all revolving credit accounts, you should keep your balances at or below 30 percent of the high limit.
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