Buy a House After Short Sale

Following a short sale, borrowers may find it challenging to obtain mortgage loans at the most advantageous rate.

In some cases, borrowers will be required to put down a larger down payment to compensate for the risk which they present to the lender. At the very least, many loan programs will include a waiting period of two to three years before borrowers regain eligibility.

Depending on your desired loan program, credit score, and finances, securing a mortgage to buy a house after a short sale could be relatively straightforward or dauntingly difficult.

Consider the following factors which affect mortgage acquisition following a short sale.

Short Sale Repercussions & Waiting Periods

A short sale is a transaction in which the lender authorizes a home sale for less than the amount owed on the mortgage. In many cases, the lender must simply write off the remaining balance of the loan, as the process of foreclosure would be an even greater expense.

Following a short sale, a borrower’s credit will incur a substantial blemish, dropping approximately 100 points, thus making it difficult to secure a new home mortgage loan.

FHA Loan Option To Buy a House After Short Sale

When buying a house after a short sale, many borrowers choose to secure FHA loans, as the Federal Housing Administration (FHA) does not impose as lengthy of a waiting period as conventional mortgage loans. 

With lenient credit requirements, FHA loans can be an excellent option for borrowers with damaged credit who wish to purchase a home after a short sale.

• With extenuating circumstances and no delinquencies, the waiting period for securing an FHA loan following a short sale can be less than two years.
• Without any circumstances or delinquencies, the waiting period for securing an FHA loan following a short sale is at minimum two years.
• With no extenuating circumstances and a recorded delinquency, the short sale waiting period is a minimum of 3 years.

Conventional Loans after Short Sale

Another option to consider is a conventional loan, which carries much more strict credit guidelines when compared with government-backed loans such as FHA loans or VA loans. Conventional mortgage borrowers who make a sufficient down payment can avoid paying for costly private mortgage insurance.

The waiting periods associated with purchasing a house after a short sale with conventional loans depend on the borrower’s down payment size.

• For down payments of 20% or more, the waiting period for securing a conventional mortgage loan following a short sale is a minimum of 4 years or 2 with extenuating circumstances. 
• With a down payment of 10-20%, the minimum waiting period after a short sale is five years.
• With a down payment less than 10%, the minimum waiting period following a short sale may be as long as seven years.

VA Loans after Short Sale

For certain military borrowers, loans guaranteed by the U.S. Department of Veteran Affairs (VA) carry tremendous advantages over almost all other loan programs, offering 100% financing with no mandatory mortgage insurance. Due to the frequency of VA loan short sales, VA-eligible borrowers should be able to secure a VA loan with relative ease following a short sale.

• The minimum waiting period for securing a VA loan following a short sale is two years.

USDA Loans after Short Sale

Like other government-backed loans, USDA loans do not enforce strict guidelines regarding borrower credit scores, and consequently, borrowers can qualify for these loans even with poor credit to buy a house after short sale.

Following a short sale, USDA waiting periods can vary widely depending on borrower circumstances. To qualify for the minimum waiting period of two months, borrowers must satisfy the following criteria:

• Credit score of 660 or better
• No late payments within the past 12 months
• Obtain a GUS Approval

Jumbo Loans after Short Sale

Jumbo loans prove to be the most difficult mortgages to acquire following a short sale transaction. As such, if you have undergone a short sale and would like to obtain a jumbo loan, expect a lengthy delay.

• The waiting period for securing a jumbo loan following a short sale is seven years.

Short Sale Deficiency

While lenders often incur losses on short sale transactions, borrowers are not automatically released from their outstanding mortgage debt.  

In many cases, lenders will pursue the homeowners in a short sale to reclaim the difference between the home sale price and the deficient loan balance, typically through court-ordered deficiency judgments. This legal precedent allows lenders five years to seek compensation, providing up to 20 years to collect these funds. 

While lenders are commonly prohibited from pursuing such rulings, borrowers should exercise caution, and discuss this potential hazard with the lender.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.