EDITORS NOTE 10/6/2014: Conventional guidelines have changed since the writing of this post. Conventional guidelines now require a 4 year wait period regardless of how much down payment a borrower has.
A Short Sale, also referred to as a pre-foreclosure, is when a home owner sells their home for a lower amount than what is owed on the property with mortgages (deeds of trust). In order for a short sale to take place, the lien holders on the property agree to being “shorted” on the amount owed to them for the deed of trust or mortgage. Short sales became more common over the past few years following the mortgage crisis. Washington state home owners hoping to avoid a foreclosure, opted to try the short sale route.
A question I am being asked more and more is: “Who soon can we buy our next home after having a short sale?” The answer depends on a few factors.
FHA has a three year wait period for borrowers who were in default at the time of the short sale (or pre-foreclosure sale). If the borrower was not behind on mortgage payments and installment debts at the time of the short sale and for 12 months preceeding the short sale, there may be no waiting period.
FHA tends to be a popular option as the minimum down payment is currently 3.5% and FHA is more forgiving with credit than Fannie or Freddie.
Fannie Mae has various wait periods depending on loan to value:
- 2 years with a minimum 20% down payment
- 4 years with a down payment of at least 10%
- 7 years with standard down payment guidelines (varies depending on credit scores)
Freddie Mac has a 4 year waiting period.
Fannie Mae and Freddie Mac may consider “extenuating circumstances” which would allow a buyer to be considered eligible at 2 years.
VA currently does not offer guidance. Most underwriters may treat it as a foreclosure, which has a 2 year waiting period. Like FHA, if the borrower was on time with mortgage payments and other debts at the time of the sale and for 12 months proceeding, there may be no wait period.
USDA has a 3 year wait period.
NOTE: banks and lenders may have their own time frames that are longer than what is referenced than above. For example, many of the lenders we work with are not yet accepting buyers who have had a short sale two years ago. However, we do work with lenders who follow Fannie Mae’s guidelines.
The date of the short sale is based off of the date closed as disclosed on the final HUD-1 Settlement Statement from the closing of that sale. Potential home buyers should until three years have passed from that date before entering a purchase and sales agreement or a bona fide loan application.
Underwriters will scrutinize a borrowers credit history following a “derogatory” event, such as a short sale. Late payments on a credit report following a short sale and low credit scores will impact a borrowers odds of becoming “approved” with a lender. Lenders will want to see that the credit has been re-established with three to four credit lines in good standing with a two year history.
If you’ve had a short sale in the past few years and are considering buying your next home. I recommend contacting a local mortgage professional to review your credit report as soon as possible. There could be items disclosed on your credit report that you may want to deal with or perhaps you need to work on re-establishing credit. Starting early will help make sure that once your waiting period is over, you’re in a better position to become preapproved to buy your next home.
Please keep in mind that the information in this post are based on guidelines as of the date this article was published. Fannie Mae, Freddie Mac and FHA guidelines change often as do lender’s underwriting overlays.
If you are considering buying a home located any where in Washington state, I’m happy to help you. Click here if you would like me to provide you with a mortgage rate quote.