Getting Approved For a Mortgage After a Short Sale
This guide will cover getting approved for a mortgage after a short sale. To review the agency guidelines on getting approved for a mortgage after a short sale, we must first discuss what a short sale is. Wendy Lahn, a dually licensed loan officer, and realtor at Mortgage Lenders For Bad Credit, explains the definition of a short sale when it comes to the mortgage and real estate industry:
A short sale is when the homeowner owes a mortgage on the loan balance that the house is worth. The owner requests permission from the mortgage company to determine what the home is worth.
For a mortgage lender to approve a short sale for a borrower, the lender will want to see some documents. The homeowner will need to provide information on future job security and income, the home’s market value, the amount the homeowner owes to the house, and all the owner’s financials. People pursue a short sale because they try not to foreclose on the property. If the bank works with this person, they can get out of debt without the lender pursuing nonpayment on the loan. The owner must provide proof of hardship to go forward with a short sale. The process of a short sale is often a long one, and it is time-consuming. The following sections discuss getting approved for a mortgage after a short sale.
HUD Mortgage after a short sale Guidelines
HUD, the parent of FHA, wants to ensure that a borrower has reestablished credit and a minimum score of 580 for a 3.5% down payment home purchase FHA loan. This would qualify the borrower for a 3.5% down payment with FHA.
HUD allows borrowers with a 500 and up credit score to qualify for a loan; however, any borrowers with credit scores under 580 and down to a 500 score will be required to put a 10% downpayment.
Keep in mind that if you have a lower credit score, it might mean higher interest rates. This would mean you will pay more in the long run for the mortgage. If this is of great concern to you, you could always look into refinancing later in the loan to get better rates once your credit improves and you have some equity in the home.
Re-Establishing Credit To Qualify For a Mortgage After a Short Sale
If your credit has dipped after a short sale, you can reestablish your credit to qualify for a mortgage loan. Although seeing a plunge in your credit score is devastating, remember that this is temporary. Your credit can go back up with some targeted steps. There is no more critical way to ensure you will be eligible for a mortgage than working on your credit. It would be best to remember that you have control over correcting your credit score. Ronda Butts of Mortgage Lenders For Bad Credit, explains the timeframe of rebuilding your credit after a short sale:
Rebuilding and increasing your credit scores to get approved for a mortgage after a short sale takes time. It cannot be done overnight. As time goes on, and the more time has passed from the short sale, the better. The most recent credit history is most important. Pay your bills on time! This is one of the most significant factors in improving your credit score. Late payments have a significant negative influence on your score.
Become an authorized user of someone you trust with good credit. This would allow you to make purchases on their credit card, but you would not need to do that to reap the benefits. If the credit card remains in good standing, the other person’s use and timely payments can help improve your credit.
Secured Credit Cards To Rebuild Credit After a Short Sale
Attempt to get a secured credit card. This functions much like a regular credit card but requires you to deposit money as a security deposit. Making timely payments and using the credit card with restraint should positively impact your score. Another card to try to get is a retail card. These a less strict in requirements but will charge high-interest rates and fees. However, this is still a good option if you can use it only to increase your credit and use it responsibly. Credit bureaus look to see if you are keeping your credit utilization below or about 30%. It’s important to not overspend on credit and leave some of it open. It would be best to pay off some of your credit card debt. Try to limit new credit inquiries. Every time you apply for a credit card or a loan, it will affect your credit.
How Long Do You Have To Wait To Apply for a Mortgage After a Short Sale?
Unfortunately, there is a three-year period from the short sale until you can apply for the FHA loan. The three years start from the short sale date, as written on the HUD settlement statement. You will need reestablished credit. You must make all your payments on time for all your bills to get your credit back up. HUD, VA, and USDA say there may be exceptions for the waiting period after a short sale. However, it never works out:
There might be exceptions to the three-year waiting period if you experienced undo financial hardship with a 20% or more dropped income for six months or more. These are called extenuating circumstances. These instances would be something that was out of the borrower’s control. We have never seen an extenuating circumstance waiting period waiver for a mortgage after a short sale come through.
An example of this would be a death of a wage earner in the household. However, a divorce is not considered an extenuating circumstance. If you have experienced a life event that would qualify you for an extenuating circumstance, you could write a letter of explanation to see if it would allow you to qualify.
The Importance of Timely Payments In The Past 12 Months
Timely payments in the past 12 months are crucial in getting an approve/eligible per automated underwriting system. You can have high credit scores, but with late payments in the past 12 months, you may not get an approve/eligible per the automated underwriting system. HUD, the parent of FHA, may render an approve/eligible per the automated underwriting system
You could also get an exception if your mortgage were paid on time for 12 months before the sale and if it was current at the time of the short sale. Acceptable exceptions can vary from lender to lender, but they are all based on the same premise.
A short sale can drop your credit significantly. In some instances, it can drop by 200 points. Although this lower credit will affect your ability to get a mortgage after a short sale, you can take steps to get approved. Lenders do offer loans to those with lower scores because the FHA is backing these loans. A qualified and knowledgeable mortgage professional will assist you in learning what you need to do to get approved for a home mortgage after a short sale.
