First, it is important to define what a short sale is. A short sale is when you sell your home for less than your outstanding mortgage balance and your lender agrees to accept less than the amount it is owed to pay off your mortgage.
When a short sale is complete, you have sold your property and the lender releases you from your mortgage obligation, which is another way of saving that you do not owe the lender any money even though you did not repay your mortgage balance in full. Short sales were more common during the real estate crisis as homeowners faced financial hardship caused by a sudden and significant drop in property values.
A short sale can be helpful for people who are underwater on their homes (their outstanding mortgage balance is greater than the value of their home) and who are struggling to pay their mortgage. In an ideal scenario you are able to sell your home and pay off your mortgage balance in full but if that is not possible, a short sale can be a viable option because it is completed with the participation and approval of the lender.
Additionally, while the short sale process takes longer and is more complicated than a standard property purchase, it can be quicker and cleaner than a prolonged loan default and foreclosure. Although the lender’s strong preference is to recover its entire outstanding mortgage balance, a short sale may be a better and quicker option for all parties than a foreclosure or bankruptcy.
A foreclosure may provide resolution and financial relief for borrowers who are struggling to pay their mortgage but there are long-term credit consequences to keep in mind. A foreclosure is considered a significant derogatory event because you borrowed money but did not repay the full amount you owed the lender. A short sale usually appears on your credit report for seven years and causes a significant drop in your credit score in the near-term.
Because a short sale directly involves a mortgage, lenders impose waiting periods after a short sale before you can qualify for a mortgage. The length of the waiting period depends on the mortgage program you apply for and the factors that caused the short sale. We outline the standard waiting periods following a short sale below:
Conventional mortgage: four years
FHA mortgage: three years
VA mortgage: two years
Review Waiting Periods After Negative Credit Events Before You Can Apply for a Mortgage
The waiting periods are shorter if you experienced extenuating circumstances such as a job loss or significant illness that contributed to the short sale. The waiting periods following a short sale for applicants with extenuating circumstances are:
Conventional mortgage: two years
FHA or VA loan: one year or no waiting period if you did not have a late payment for the year prior to your short sale
Please note that you are required to provide documentation to verify any circumstances you experienced.
So depending on your mortgage program and your individual circumstances, you may be required to wait no time or up to four years before you can apply for a mortgage after a short sale. Additionally, if your credit score remains low due to the short sale, you may be required to pay a higher mortgage rate on your new loan, which increases your monthly payment. The table below shows mortgage rates and fees for leading lenders in your area. We always recommend that you shop multiple lenders to find the best loan terms, especially if you have experienced a negative credit event such as a short sale.
If you do not want to wait to apply for a mortgage following your short sale, you may want to consider a private money lender, also knows as a hard money lender, as they do not apply waiting periods. In this scenario, you obtain a mortgage through a private money lender and then refinance that loan with a standard mortgage as soon as the waiting period has ended and your credit profile has improved.
Review What You Should Know About a Private Money Mortgage
If you apply for a loan with a private money lender be sure to fully understand the higher interest rate, costs and fees, including any prepayment penalty, charged by the lender. You can also use the FREEandCLEAR Lender Directory to search for private money lenders in your state. Private money lenders are more expensive than traditional lenders but may enable you to qualify for a mortgage sooner.
"B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.