If you are having difficulty making mortgage payments or are underwater on your mortgage, you may be able to pursue a short sale, which allows you to sell your home for less than the amount still owed on your loan while having the remainder forgiven.
Getting another mortgage after a short sale, on the other hand, will be difficult. There will almost certainly be a minimum waiting period before you can qualify for another loan, and you may also need to improve your credit score and save for a down payment in order to qualify for a mortgage after a short sale. For example, conventional loans have a four-year waiting period after a short sale.
The ramifications of a short sale
A short sale is frequently used by distressed homeowners to avoid foreclosure, which can have far-reaching financial consequences. A foreclosure and a short sale can both harm your credit, but the latter may be less damaging. Still, if you’re wondering how long a short sale stays on your credit report, the answer is seven years, which may affect your future loan eligibility.
“The reasons can vary, but a short sale frequently occurs because the seller paid too much or borrowed too much for the property, or the market has dropped and the property’s market value is less than the mortgage balance,” explains the National Association of Realtors.
“Typically, the bank or lender agrees to a short sale in order to recoup a portion of what is owed to them,” says Kahan.
Because you are required to repay your mortgage in full, you and your lender must agree to the short sale before it can take place, according to Suzanne Hollander, an attorney and real estate professor at Florida International University in Miami.
“A mortgage’s ‘due on sale’ clause is a type of acceleration clause that requires the borrower to pay the entire debt at the time the property is sold,” Hollander explains. “That is why a borrower must formally request permission from the lender to sell the property for less than the loan amount through a short sale.”
Hollander warns that lenders have specific policies or procedures that must be followed if a short sale is pursued. The process is frequently lengthy, and many lenders either decline or do not respond to short sale requests.
How to Get a Mortgage Following a Short Sale
The good news is that you can get a new mortgage after a short sale, but it will be more difficult and time-consuming. Mortgage rates may rise as well.
“Be aware that lenders will be more cautious when you try to get another mortgage,” says Steve Nakash, executive managing director of Blue Spot Home Loans, a division of Cherry Creek Mortgage in Greenwood Village, Colorado. “You now have a history of being unable to pay, and lenders will closely examine your credit after a short sale to ensure you can make the new payments.”
According to Kahan, a short sale can reduce your credit score by 50 to 200 points, making many loans inaccessible. For example, conventional loans may be difficult to obtain after a short sale because they typically require a minimum credit score of 680.
You can work to raise your credit score to the required level, but it will take time and effort.
“Saving up a larger down payment than the minimum required by the lender can also expedite the process,” says Raisul Islam, chartered accountant and director of Hadee Lutful & Co.
The shortest time it takes to get a mortgage after a short sale.
There are minimum waiting periods before applying for a new mortgage or refinancing after a short sale, depending on the loan type. Please keep in mind that these are general requirements that may differ depending on your personal financial situation.