At some point in our lives, everyone goes through difficult times. Whether through extenuating circumstances or our own fault, there are consequences. Sometimes, these consequences cause derogatory credit. A short sale is an example of a derogatory housing event. Basically, it means that upon the sale of the property, the lien payoffs against the property exceed the proceeds of the sale. Which means there isn’t enough money to pay off the mortgage(s). So, a lender may accept an amount short of the actual payoff.
Fortunately, the number of these negative housing events have decreased significantly since the housing crisis. Even though the number has dropped significantly since the real estate bubble, they still occur. Many think home ownership can’t happen again for a minimum of 7 years. Not true and we will show how buying a home is possible again.
Mortgage After Short Sale
In order to get a mortgage after a short sale, it is key to re-establish credit. Besides an acceptable credit score and the required time since the sale, on-time rent history is the foremost requirement. Basically, after short sales, lenders want to see that the borrower can now pay a housing payment. For additional re-established credit, some options below allow for nontraditional credit sources.
Short Sale Documentation
Prepare for FHA Underwriting. Provide the following to document a short sale:
- Signed seller closing disclosure or HUD settlement statement
- Signed letter of explanation for circumstances causing event
- Documentation to prove exceptions
- Re-established credit including rent history
- Property deed
The seller closing disclosure or settlement statement proves the closing date. Plus, proves the mortgage satisfaction. The recorded deed proves the date which title to the property changed hands. That is the date which the clock starts ticking.
As shown below, each mortgage program treats previous short sales a little differently. So, there are advantages and potential hurdles with each. Let’s discuss.
FHA Guidelines After a Short Sale on Previous Residence
Generally, FHA requires that at least three years have passed from the date of the short sale through the FHA case file number. Although, under extenuating circumstances, it is possible to buy with less than three years. Extenuating circumstances are situations beyond the borrower’s control such as serious illness or death of a wage earner. FHA specifically mentions that divorce or job relocation are not extenuating.
There is a divorce exception when the borrower’s mortgage was current at the time of the divorce, the ex-spouse received the property, and there was a subsequent short sale. In this case the borrower had no control of the property, so this could work.
Appropriate documentation must be provided to prove the time lapse, circumstances, and re-established credit.
Usually lenders approve short sales for borrowers who are behind on their mortgage payments. Yet, not all borrowers with short sales were behind prior to closing. FHA allows an exception for this case.
FHA Exception for Borrower Current at Time of Short Sale
- All prior mortgage payments were made within the month due for the 12 month period preceding the event, and
- Installment debt payments for the same period were also made within month due
Different mortgage products have varying requirements for time elapsed after a short sale but keep in mind that just because the time requirement has been met, the credit scores and overall strength of the file is also important.
USDA Guidelines for Previous Short Sale
USDA lumps foreclosures, pre-foreclosure sale, and short sales into the same category. Therefore, the requirement for all three is at least 3 years past the event. Also, USDA provides an exception for short sales which were current and paid on time the previous 12 months. Like FHA, if the mortgage was on-time at the time of a divorce and the ex-spouse short sells the property, it is not held against the buyer. Finally, buyers with short sales to take advantage of a declining market and buys within a reasonable commuting distance.
USDA Short Sales Exceptions
There are exceptions which USDA allows lenders to make when warranted. The first involves a temporary situation. Basically, the issue was temporary, beyond the borrower’s control, and was resolved at least 12 months prior to application. Examples include job loss, reduction in benefits, illness, or dispute over payment for defective goods or services.
Another possible exception involves reducing the housing expenses. USDA sees a 50% drop in housing expense as a reason to provide an exception. This would put the borrower in a much better situation. The underwriter will consider the overall strength and circumstances involved.
VA Loan Guidelines for Short Sales
VA’s stance on short sales is if the Veteran’s overall credit record is good, selling the home short of the payoffs is not an automatic denial. When the borrower’s payment history was satisfactory prior to the short sale, a waiting period may not be necessary. In the case of a short sale in conjunction with a bankruptcy, VA goes by the later of the sale or bankruptcy discharge.
Just like other loans, it is key to re-establish credit after a short sale.
Short Sales Affect VA Entitlement
A VA short sale affects the Veteran’s entitlement. Many do not realize this, but a short sale which ties up VA entitlement does not keep a Veteran from using VA again. A Veteran may still have the option of using bonus entitlement to use a VA loan again on a purchase.
Fannie Mae Short Sale Seasoning Guidelines
Short sales (Fannie describes as pre-foreclosure sale), deed in lieu of foreclosure, or mortgage charge-off are treated the same. Each requires a 4 year waiting period, unless the reason was an extenuating circumstance. If documentation proves an extenuating circumstance, then the waiting period is only 2 years.
Fannie Mae Re-established Credit Requirement
After short sales, Fannie Mae considers a borrower to have re-established credit once the following have been completed:
- Met applicable waiting period
- Automated Fannie Mae pre-approval
- Borrower has re-established sufficient traditional credit – Nontraditional or thin credit is not acceptable
Freddie Mac Short Sale Seasoning Guidelines
Freddie Mac mirrors Fannie Mae’s guidelines above. Additionally, if there was a short sale within 7 years, the following requirements apply:
- Primary residence purchase
- Maximum loan to value is 90% or program max, whichever is less
- No cash out refinance
It is easy to see that homeownership is possible after a short sale and it could be sooner than originally thought. Contact an OVM Financial loan officer now to take the next step.