Buying a house is a huge step and a significant investment. However, it can seem like an even bigger challenge if you have gone through a short sale in the past.
A short sale is when a homeowner sells the property for less than the balance they owe on the mortgage. A short sale can negatively impact your credit score and make it difficult to secure financing for a home loan in the future. But at the same time, it is also a valuable learning experience and a chance to start fresh.
So, despite the challenges, it is possible to buy a house after a short sale. The key is to assess your financial situation, understand the home-buying process, and take steps to improve your chances of getting approved for a mortgage. In this article, we will walk you through the steps you need to take to successfully buy a house after a short sale and achieve the joys of homeownership.
What Is a Short Sale?
When a homeowner falls into dire financial straits and realizes they can no longer afford the mortgage payments, they might choose to sell their home for less than the balance owed on the mortgage. This kind of real estate transaction is termed a short sale. In a short sale, the homeowner submits an application letter to the lender, who will then approve or reject the application. Typically, a lender agrees to accept the proceeds of the short sale either when the home is worth less than the outstanding mortgage balance or when the seller can prove their financial hardships.
Generally, a short sale help avoids the costly and time-consuming foreclosure process. However, it can significantly impact the seller’s credit score. When a lender agrees to a short sale, they essentially agree to write off the outstanding mortgage balance as a loss. This will be reflected on the seller’s credit report and can result in a drop in their credit score, making it more difficult to secure financing to buy a home in the future.
In addition, many lenders have a waiting period before they would consider lending to someone who has gone through a short sale. Depending on the lender and the individual’s circumstances, this waiting period can range from two to seven years. Nonetheless, the good news is that you can work on improving your credit score and financial situation during this time, so you will be in a better position to secure financing once the waiting period is over.
Preparing to Buy a Home After a Short Sale
As stated earlier, there is often a waiting period associated with a short sale before which the seller cannot avail of a home loan. This waiting period can vary, but it is typically two to seven years. As a responsible homebuyer who has undergone a short sale, you must make the most of this time by improving your financial situation. Here’s how.
● Improve Your Credit Score
A short sale can cause your credit score to drop significantly. Hence, improving your credit score should be at the top of your mind as you wait for the restrictive period to be over. Start taking small steps like paying bills on time, reducing debt, and limiting new credit inquiries. You can also obtain a copy of your credit report, analyze it for any errors that might be negatively impacting your score, and get those corrected. Keeping your credit card balances low and paying off debts will also help increase your credit score.
● Research The Available Loan Options
Though you might not be eligible for many different mortgage types, there still exist a few home loan types that home buyers can apply for after a short sale. These include conventional loans, FHA loans, and VA loans.
Conventional loans are not backed by the government and typically have more stringent credit and income requirements. According to Fannie Mae guidelines, a person can apply for a conventional loan seven years post-short sale with a down payment of 10% or less. Your credit score must be 680 or more. Nonetheless, with acceptable extenuating circumstances, you can avail of a conventional home loan in 2 years by paying a 20% down payment.
If you have a credit score of 660 and have not been late on your previous mortgage payments, you can apply for a VA loan two years after a short sale. This type of loan is specifically designed for military veterans and is backed by the Department of Veterans Affairs.
Finally, the FHA loans backed by the Federal Housing Administration allow buyers to avail of another mortgage as soon as the next day post-short sale. Yes, there is no waiting period here! The only requirement is that you shouldn’t have any late payments on your previous mortgage or credit lines. If you default on the payments, the waiting period is three years.
It is essential to understand the requirements and benefits of each type of loan, so you can choose the ideal fit for your needs before the waiting period comes to an end.
● Know That It Is Ok to Ask for Help
The home-buying process can be complex and overwhelming, especially after a short sale. Don’t be afraid to ask for help from a financial advisor, real estate agent, or housing counselor. These professionals can help you navigate the process, understand your options, and make informed decisions. They will also help you prepare your finances, find the right loan program, and ensure your journey is as smooth as possible.
Pursue Your Dream of Homeownership
Buying a house after a short sale can be challenging, but it isn’t impossible. All it takes is preparation, determination, and a proactive approach to improving your financial situation. Start by improving your credit score and researching different loan options available after a short sale. Also, remember to seek help when needed. Slowly and steadily, you will be able to achieve the dream of homeownership and enjoy its benefits for years to come.
Contact Jackie Ruden Realty Team
Give us a call today at (435) 272-7710 to set up a time to discuss your current and future real estate goals in regards to buying a home or buying a property in trust. We look forward to working with you to make your goals a reality.