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Are you underwater on your home and finding it hard to pay your monthly mortgage? A short sale could be the ideal solution.
With a short sale, you sell your property for less money than your remaining mortgage loan debt, with your lender agreeing to accept this discrepancy and forgive any remainder owed.
But following a short sale, you may be wondering: Can I get another mortgage loan? Fortunately, the answer is yes, although it could be tricky.
There are waiting periods involved and other restrictions, and you’ll have to rebuild your damaged credit. Find out what to expect after a short sale, minimum waiting times before you can get another mortgage loan, best practices to follow after a short sale, and what you can do if you are denied a mortgage following a short sale.
What to expect after a short sale
Truth is, you can anticipate your credit score dropping after a short sale, possibly by up to 150 points. In addition, the short sale itself will be visible on your credit reports for a maximum of seven years.
These two factors will make it challenging to be eligible for future credit, including a mortgage loan. Additionally, even if you are approved for a loan, you will probably pay more for financing than you would have if you never completed a short sale.
“Obtaining a mortgage after a short sale will be difficult, particularly due to the impact on your credit scores. However, it’s possible with time and the right financial recovery strategies,” Dennis Shishikov, adjunct professor of economics at City University of New York, notes.
Doug Van Soest, co-founder of So Cal Home Buyers, seconds those sentiments.
“The impact of a short sale on your credit score will influence lender perceptions, potentially resulting in stricter down payment demands and higher interest rates,” he says.
Waiting times after a short sale
Curious how long you’ll be required to sit things out after a short sale? Here are the minimum waiting periods before you can apply for a mortgage loan based on loan type:
- Conventional loan: 2-4 years*
- FHA loan: 3 years*; no wait applies if you were not in default on your previous home loan during the time of sale and if you paid that mortgage punctually in the 12 months prior to the sale
- VA loan: 2 years*; no wait applies if you kept up on timely payments before the sale
- USDA loan: 3 years
- Non-qualifying loans: No waiting required
*Some exceptions apply
“The best way to get a good mortgage following a short sale is to wait out the timeframe required for the loan program you are looking for,” says Mark Worthington, branch manager and senior loan officer for Churchill Mortgage. “There are some alternative loan programs with shorter time frames, but you will often need a larger down payment and have to accept a higher interest rate.”
You may be able to shorten the waiting period on certain loans “if you can demonstrate extenuating circumstances with a compelling hardship narrative,” adds Van Soest.
“Extenuating circumstances” typically include significant life events like a serious sickness or injury, sudden job loss, or death of a wage earner in the family.
» MORE: See today’s refinance rates
Steps to take after a short sale
Especially if a minimum wait period applies, you can devote time to improve your chances of qualifying for a future mortgage loan by following best practices.
“First, make sure your name is removed from ownership of the home following the short sale,” Worthington suggests.
Work hard to rebuild your credit, too.
“After the short sale, review your three free credit reports for inaccuracies and errors, and report any you find to the three credit reporting bureaus to get them removed from the reports,” advises certified financial planner Jeff Rose.
Take necessary steps to up your credit score, as well. That means paying all your bills on time and in full whenever possible, paying down any other outstanding debt balances, and not applying for any new credit accounts, loans, or lines of credit unless you can count on making payments by the deadline and not overspending or maxing out your available credit on these accounts.
Additionally, don’t close any credit cards you currently have.
“Also, work hard to save up for the down payment on your next mortgage loan over this time,” says Shirshikov. To help matters, tighten your financial belt by cutting down on unnecessary spending, and formulate a workable budget plan you intend to follow.
“While this path back to creditworthiness may be steeper, meticulous planning and financial discipline will unlock the gate to your next mortgage,” says Van Soest.
Keep in mind that it can take several months to rebuild your credit score, especially if it has dropped precipitously since the short sale, so give yourself ample time before applying for a mortgage loan.
Once the time is right, shop around among several different lenders, request rate quotes and loan offers, and compare these offers carefully to determine which mortgage loan option is best for you.
What to do if you get turned down for a mortgage
Don’t lose hope if your mortgage loan application is denied. While your likelihood of getting approved is better if the minimum wait time has passed, many borrower candidates experience frustration and difficulty finding a willing lender post-short sale, so you’re not alone.
Truth is, you may have to work harder and take extra time to improve your credit score and salt away extra cash toward a larger down payment before re-applying with a lender.
“Patience is crucial here,” continues Van Soest. “Overcoming the aftermath of a short sale for future mortgage aspirations requires a strategic approach. Always be transparent in your communication with lenders to build trust.”
Van Soest recommends asking the lender if getting a co-signer on your loan would help matters. If so, consider asking a trusted loved one, relative, or friend to co-sign your mortgage loan if necessary.
“Explore alternative lending options, too,” Rose says. “If you got turned down for a conventional loan, for example, consider applying for an FHA loan or USDA rural property loan. Or, if you are an eligible veteran, military member, or surviving spouse, you may qualify for a VA loan, which requires no down payment.”
If you’re still out of luck on mortgage approval, consider a non-qualifying mortgage loan, subprime loan, or personal loan; an unsecured personal loan can be had without collateral involved, but you may be charged a much higher interest rate than a mortgage loan.
The bottom line
Don’t beat yourself up about having to pursue and complete a short sale. The good news is you’ll no longer be on the hook with mortgage debt, but you may find it harder to get another mortgage loan.
Find out how long you’ll be required to wait before applying for new home financing, and take the steps recommended to rejuvenate your creditworthiness.