How Can I get a mortgage after a short sale of my home?

Short sales allow homeowners who have difficulties paying their mortgage payments or are underwater on their house to sell the property and have the difference between the sales price and the amount still outstanding on loan forgiven.

However, acquiring another mortgage after a short sale will take a lot of work. After a short sale, you may have to wait a certain amount before applying for another loan, and in the meanwhile, you'll need to take steps to improve your credit and put up a down payment if you want to get a mortgage again. For example, after a short sale, you might have to wait up to four years to apply for a conventional loan.

Consequences of a Short Sale

In many cases, a short sale can help a financially-strapped homeowner escape foreclosure and its potentially devastating effects. Your credit may take less of a hit if you opt for a quick sale instead of foreclosure. Even so, a short deal will remain on your credit report for seven years, which may affect your future loan applications.

To "recoup some of what is owing to them," as Kahan puts it, "the bank or lender typically agrees to a short sale." According to Suzanne Hollander, an attorney and real estate professor at Florida International University in Miami, for a short sale to go through, you and your lender must agree that you will not default on your mortgage payments.

According to Hollander, a mortgage's "due on sale" clause is an example of an acceleration clause that mandates full repayment of the loan upon the sale of the collateral. To conduct a short sale, a borrower must first obtain the lender's approval, which may only be done.

A Formal Request

Hollander warns that short sales can only be pursued after adhering to the lender's particular policies or processes. As an added complication, many lenders refuse quick sale requests or don't reply, adding even more time to the process. It's important to remember that getting a mortgage quickly following a short sale doesn't indicate you should.

Before applying for another mortgage, Islam advises that borrowers show they are financially stable and commit to sound financial habits to avoid having to resort to a short sale in the future.

Finding a Lender after a Short Sale

The good news is that it is possible to qualify for a new mortgage following a short sale, albeit the process can be more time-consuming and challenging. Mortgage interest rates could go up as well.

After a short sale, your credit will be scrutinized by lenders to make sure you can afford the new payments because of your "history of not being able to pay."

According to Kahan, a short sale can drop your credit score from 50 to 200 points, making it difficult, if not impossible, to qualify for many loans. For instance, getting a conventional loan following a short sale may prove challenging because of the often-required 680 credit score. A credit score of at least 500 is required for an FHA loan with a 10% down payment, and a score of at least 580 is required with a 3.5% down payment.

Subtypes of Debt Consolidation Loans

Don't close unused credit cards. You might also consider applying for other new lines of credit, but only if you intend to make timely payments and utilize them properly. Determine how long it will take to save up for the minimum down payment on your next loan, and work diligently toward that objective.

Shop around carefully for loans from various lenders, and compare rates and terms thoroughly. If you have less than 20 percent down, you'll have a longer wait: usually four years with 10 percent down and seven years with less than 10 percent down.

You may also be eligible to apply for a mortgage with no delay whatsoever if you weren't in default on your former mortgage at the time of sale and you paid it on time in the year before the sale.

Rebuilding Credit after a Short Sale

Make no mistake: A short sale might ruin your credit. And like a foreclosure, it will linger on your credit report for seven years. If you want to buy a home in the future, you’ll need to repair your credit to be eligible for the best interest rates and loan programs imaginable.