What are your mortgage options if you had a short sale two years ago?
Lenders apply waiting periods after a derogatory credit event such as a short sale before you can apply for a mortgage. The waiting periods following a short sale are four years for a conventional mortgage, three years for an FHA mortgage and two years for a VA mortgage.
The waiting periods are shorter if you experienced extenuating circumstances such as a job loss, illness or divorce that caused the short sale. The waiting periods after a short sale if extenuating circumstances apply are two years for a conventional mortgage and one year for an FHA or VA mortgage. If you had no late mortgage payments in the year prior to the short sale, there is no waiting period for an FHA or VA mortgage.
Review Waiting Periods After Negative Credit Events Before You Can Apply for a Mortgage
Please note that to qualify for the extenuating circumstances guideline you are required to provide a letter of explanation as well as documentation such as a termination or layoff notice, medical records or divorce agreement to verify the events that apply to you.
If you experienced a short sale two years ago that was caused by extenuating circumstances, then you may be able to qualify for a conventional mortgage today. If extenuating circumstances were not involved then an FHA mortgage is likely your best option because the required waiting period is shorter than a conventional loan.
Review our FHA Mortgage Guide
Additionally, the FHA Mortgage Program requires a credit score of 580 if you make a down payment of 3.5% and a score of only 500 if you make a down payment of at least 10%. This is advantageous because in most cases a short sale causes your credit score to drop significantly. Depending on how much your score has recovered since the short sale, the more flexible FHA loan eligibility guidelines may provide the best opportunity for you to qualify for a mortgage.
The drawbacks of an FHA mortgage are that you are required to pay upfront and ongoing monthly mortgage insurance premium (MIP) fees in addition to your other closing costs and loan payment. Additionally, the FHA Program applies loan limits that cap your mortgage amount.
The table below shows mortgage terms for leading FHA lenders in your area. Please note that the closing costs for an FHA loan are higher because they include the upfront FHA mortgage insurance fee. We recommend that you contact multiple lenders to compare mortgage rates and costs. Shopping lenders and comparing proposals is the best way to save money on your mortgage.
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In addition to conventional and FHA mortgages, there are other financing options for borrowers who experienced a short sale including NACA and private money lenders.
The NACA Mortgage Program enables borrowers to purchase a home with no down payment and no closing costs. Additionally, the program uses a character-based borrower credit evaluation instead of requiring a minimum credit score, which may be more accommodating for applicants with a short sale on their credit record.
Review our NACA Mortgage Program Guide
The application process for the NACA program is different than for other low down payment mortgage programs plus you are required to fulfill an ongoing community advocacy requirement after your loan closes. You can learn more and apply for the program by visiting the NACA website.
Your final financing option if you do not want to apply for NACA or wait for a conventional or FHA mortgage is a private money loan. Many private money lenders, also known as hard money lenders, offer mortgage programs that do not require you to wait to apply after a short sale, although you pay a significantly higher interest rates and fees.
If you decide to apply for a private money loan, we recommend that you refinance the loan with a conventional or FHA mortgage as soon as possible, keeping in mind any prepayment penalty you may be required to pay. In a best case scenario, your credit score also increases which enables you to qualify for improved mortgage terms when you refinance.
Review How a Private Money Mortgage Works
If you apply for a private money mortgage be sure to fully understand the significantly higher mortgage rate, costs and potential prepayment penalty charged by the lender.
You can use the FREEandCLEAR Lender Directory to search for private money lenders. These lenders are usually much more expensive than traditional mortgage lenders such as banks, mortgage brokers and credit unions but private money lenders may offer programs that better meet your mortgage objectives after a short sale.
Sources
"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.
"II.A.4.b.iii. Evaluating Credit History (TOTAL)." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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