If you've sold your house in a short sale, you aren't necessarily destined to renting for the rest of your life. While you might not be able to move right from the house you sold into a new one that you bought, buying a home after a short sale is something that you can do in time. Here is a simple four-step process that can get you from short sale to homeowner in less time than you might expect.
1. Confirm the Sale Was Reported Correctly
Once the short sale process is finished, ask your lender for a short sale letter. The letter is a document that confirms that you negotiated a short sale instead of being foreclosed on. While you are doing this, order copies of all three of your credit reports -- you're entitled to one free copy of each per year. If any of the reports show a foreclosure rather than a short sale, you can send a copy of the letter to your credit bureau's dispute resolution team and have the report corrected. Keep a copy of your letter, too. You can use it again if your previous house comes up when you are ready for buying a home after a short sale.
2. Manage Your Credit
Short sales can affect your credit as much as a foreclosure does. While the impact can vary depending on your situation, a short sale could affect your score by anywhere from 50 to 160 points. If you go into a short sale with strong credit, it could take up to seven years to recover to what it was before the short sale.
But it won't take seven years for your score to start improving. Taking care of your credit can reduce the damage that the short sale causes and get your score high enough for a mortgage sooner than you might think. While everyone's situation varies, here are a few credit strategies that can help get you on the path to buying a home after a short sale:
- Pay all of your bills on-time, every time.
- Be careful applying for new credit.
- Use as little of your credit limits as possible -- less than 30 percent is good and less than 10 percent is even better.
- Don't close existing credit cards, since the higher your (unused) credit limit, the better off you usually are.
Most lending programs have waiting periods during which they won't lend to you. Borrowers who go through a foreclosure typically have to wait seven years before they're eligible to apply for a mortgage again. Short sellers, on the other hand, may qualify again after just two years. These programs and rules change periodically, so it's always best to check with an expert mortgage lender. Here are some rules of thumb for different programs:
- Conventional Loans: Two to seven years, depending on how large of a down payment you can make.
- VA Loans: Two years.
- FHA Loans: Three years.
However, if you have extenuating circumstances, both conventional loans guaranteed through Fannie Mae and Freddie Mac and FHA loans can offer shorter waiting periods. The circumstances vary, but can include job loss, illness, or the death of a family member. IF they apply, you could be ready for buying a home after a short sale relatively quickly.
4. Get Preapproved
When you think you'd like to look into buying a home after a short sale, talk to a mortgage lender about getting preapproved. The lender can review the available programs and your situation and let you know if your situation fits with the lender's timeframes. If it does, the loan officer can look at your credit and income, and, if you qualify, get you a commitment. That preapproval lets you shop with confidence and gives you the ability to start writing offers and going back to being a homeowner.
Have you tried buying a home after a short sale? How did it go? Let's talk about it in the Comments section below!