Signing mortgage documents and getting the keys to your new home is a major accomplishment. Maybe you took a second job or cut extra spending in order to save cash for your down payment and closing costs. And if you had a low FICO score, you may have employed every credit trick in the book to raise your personal rating and qualify for a mortgage.
However, closing on your mortgage and moving into your new home doesn’t guarantee stability. Personal finances can change in the blink of an eye, and it only takes one major life event to create mortgage payment problems. You might deal with a job layoff, develop an illness, go through a divorce or suffer an injury that prevents work. Regardless of the circumstances surrounding your situation, if you fall behind on your mortgage payment, expect your lender to come knocking.
There are, however, ways to avoid a foreclosure, and many distressed homeowners speak with their lenders about short selling. The consequences of a short sale are less severe than a foreclosure. Nonetheless, there are consequences, and these often deal with credit scores and the ability to qualify for home loans in the future.
Short Sale and Consequences
A short sale is a hardship provision offered by many home loan lenders. If approved, your lender gives you permission to sell your home for less than you owe the bank. Mortgage lenders take a loss with each short sale, but in the end, this provision makes financial sense.
If you can no longer pay your home loan payment, and you’ve exhausted all options, you might conclude that it’s easier to throw in the towel and let the home foreclose. However, this is a headache for lenders, as foreclosures create an inventory of vacant properties. And frankly, many mortgage companies can’t keep up with this inventory. From their standpoint, short sales are the lesser of two evils. A low asking price typically sparks interest and improves the odds of a fast sale, thus relieving you of the debt sooner.
But while a short sale can be the answer to your mortgage problems, it’s not without consequences. Because you’re settling the debt for less than you owe, expect your credit score to decrease as much as 85 to 160 points. This can drop an 800 credit score down to 640, and with a score in this range, you may not qualify for certain types of loans, or pay a higher interest rate if approved.
Plus, with a short sale on your credit report, this impacts when you’re able to qualify for another mortgage. The circumstances that led to your short sale may have been temporary, but the physical damages of short selling can impact your financing options for years.
Can You Qualify for a Mortgage after a Short Sale?
In short, yes. Is it easy to get a mortgage after short selling? Absolutely not. Some people mistakenly downplay the damaging effects of their short sale. In their minds, the short sale wasn’t nearly as bad as a foreclosure, and some assume that they can easily qualify for a home loan as soon as they get their finances back on track. Unfortunately, this isn’t the case. Although mortgage lenders may prefer a short sale over a foreclosure, there is a price to settling a mortgage debt.
Mortgage lenders have long memories, and they’re not as forgiving. Each situation is different and lenders do take circumstances into consideration. But even if you requested a short sale for reasons beyond your control, future lenders will place you in a high-risk category. Yes, you can qualify for a home loan, but you’ll essentially have to reprove your creditworthiness. This can take time.
Minimum Requirements to Buy a House after Short Sale
Are you thinking about re-entering the housing market after a short sale? Make sure you understand the wait period and down payment requirements. Wait periods begin from the short sale closing date.
Conventional mortgage loans: (680 minimum credit score)
- two-year wait period with a 20% down payment
- four to five-year wait period with a 10% down payment
- borrowers with less than a 10% down payment have to wait at least seven years
Federal Housing Administration loans (FHA): (620 minimum credit score)
- three-year wait period with a 3.5% down payment
Veterans Affairs loan (VA)
- two-year wait period, no down payment required
Way to Raise Your Credit Score
Because your credit score will take a hit after a short sale, it is important that you adopt and maintain excellent credit habits. These habits will boost your score faster, helping you qualify for a mortgage sooner. Pay your bills on time each month, and contact your creditors to negotiate an alternate plan if you can’t pay by a due date. Do not max out your credit cards, and aim to pay off credit card balances in full each month. Use cash whenever possible to avoid debt, and only apply for credit when necessary.