There is a lot of misinformation going around about what the impact of a Short Sale is on your credit and whether you can get a new mortgage after short selling a home. Below are the current Guidelines for FHA, and Fannie Mae.
FHA has recently changed their rule so that if a short sale occurred and all of the borrowers payments were made on time (no late payments) then they may be eligible for a new mortgage as long as the short sale was due to extenuating circumstances and not to simply take advantage of market conditions (see below). As you can imagine, this may be difficult to demonstrate. Otherwise, if any payments were made late or you cannot demonstrate extenuating circumstances, then it is a 3 year period before new FHA financing can be considered.
Fannie Mae policy is pretty straight forward – It is a minimum of 2 years to re-establish credit after a short sale.
It is very difficult to predict how a short sale will affect an individual’s credit score because there are so many different factors involved; How good was the credit to begin with? How many house payments were made late? Did they pay all of their other bills on time? Etc, The short sale will most likely be reported as a settled account paid for less than the amount owed and will have a dramatic impact on credit score even under the best of circumstances.
Here is the excerpt straight from FHA:
Borrowers are not eligible for a new FHA- insured mortgage if they pursued a short sale agreement on his or her principal residence simply to
•take advantage of declining market conditions, and
• purchase at a reduced price a similar or superior property within a reasonable commuting distance.
Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g
Borrowers Current at the time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage
•All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and
• All installment debt payments for the same time period were also made within the month due.
Borrowers in Default at the time of Short Sale
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.
Note: Borrowers who sold their property under FHA’s pre-foreclosure sale program are not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.
This is Fannie Mae’s Guideline:Preforeclosure Sale
A two-year period is required to re-establish credit, measured from the completion date.
Written by Ken Mascia
Prime Capital Mortgage, 248.644.1200
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mon 01.07.10 at 1:30 pm
I was wondering if you had some extra clarity on short sale issues as there’s a lot of opinions out there and I wonder if they are legit.
Being stuck underwater in a house I bought before I married can I do a short sale and have it only affect my credit and thus get a new house right away with my husband as the main buyer?
Also people have advised to buy a new house, then do a short sale on the old one, it seems like a scam and is it even possible?
Thanks.
Ken Mascia 01.07.10 at 1:49 pm
Hi Mon,
If you are the only one on the loan for the existing home then a short sale of it would not impact your husbands credit and he could buy a new home using only his income and credit.
In order to purchase a new house while keeping the old home you would have to qualify for all of the debt on the old house and the new house.
If you are in Michigan and would buy in Michigan you can call me to discuss possible options at 248-644-1200. Thanks
marianne 01.16.10 at 7:26 pm
I’ve just been told this week by my real estate agent that Fannie Mae is the WORST with short sales, because they have a MANDATORY default rule before they will even consider you for a short sale. Meaning, that you have to be delinquent at least one month before they will let you start the short sale process. This sucks, because we’ve NEVER been late on a payment, and by their stupid rules, we are now going to have to be delinquent in order to sell our condo. And beware, because we had a Countrywide loan, bought out by BofA, and we discovered that most of their loans are backed by Fannie Mae. Which means that even if you try to be a good homeowner, and create a good credit score, THEY WON’T LET YOU!! They MAKE you default on the mortgage, then because it takes at least 6mo to complete the short sale, you are forced to be delinquent the WHOLE TIME. Bastards.
Ken Mascia 01.18.10 at 3:55 pm
Hi Marianne,
It is a tough spot to be in and I understand your position. You have to try to maintain on-time payments as much as is possible to limit the impact to your credit score. From the banks point of view – they are losing the money on the short sale and have a right, and obligation, to ensure that people who are taking advantage of short-selling a property are in fact in financial distress and not just being opportunistic.
Stephanie 01.25.10 at 12:09 pm
Hi Ken,. I just dont understand one thing, what does it mean : ‘borrower didn’t miss any payments prior to doing the short sale’. I havent missed any payments on my home in 3 years but I need to relocate to another city in the next few weeks . I am considering a short sale on my current home since I am upside down and there is no way it will sell for what I originally purchased., but does that mean I have to keep paying my current mortgage until the short sale closes? or is it until I list my house with an agent for short sale? Also, isn’t it true that for banks to even consider you for a short sale, you MUST be behind on payments? I am confused. Do I purposely stop paying to be eligible to short sale and if so, will that affect me from qualifying for this new FHA loan program? please help, I am not sure what they mean by this. When is the last payment I need to make to qualify for this program?
Ken Mascia 01.25.10 at 12:25 pm
Stephanie,
If you miss ANY payments on the home before or during the shortsale process you will not be eligible for mortgage financing for a minimum of 2 years for conventional loan and 3 years for FHA financing based on current guidelines. You must continue to make the payments on the home until the sale closes and the loan is paid off if you want to have the possibility of buying a new home in the near future. I don’t know that a bank will not consider the short sale unless you are behind on payments. The first step is to contact your bank and start working with them. It is a slow process to be sure, so you’ll need patience.
Amy 02.08.10 at 3:48 pm
I’m in the same boat as Marianne…
I’ve owned my home for over ten years, never been late on my payments, excellent credit.. yadda yadda.. I’ve had a for sale sign in my yard for almost 5 years, lowered the price to the point where I’m over-mortgaged (Originally listed for $114, I owe $66k, and now a realtor wants to try to short sale at $30k).
The problem is now that my husband and I are both unemployed, contracted as self-employed making just enough to pay our bills – BUT, my daughter needs a surgery that will be performed in another state (within a year) and I can’t wait out this mortgage crisis. I don’t know what I should do.. I’m literally unable to sell. My hands are tied.
My mortgage company will not allow a short sale (tried with a buyer who was able to get financing for $60k, just $8k under what my mortgage balance was at the time) and they still said no. Found a couple willing to pay $90k (appraised value) with a land contract and they still said no and threatened to foreclose. I don’t know what to do!
It appears the only option I have is to just stop paying and foreclose? I really hate that as the only option because I have EXCELLENT credit (790 score).
Anyone have any advice to possibly avoid this trap?
drew 02.17.10 at 1:57 pm
Ken,
FNMA is actually similar to FHA on a “short sale”, can get a mortgage immediately if no lates.
FNMA is the only agency that recognizes a “pre-foreclosure sale” separately. For that, there is a minimum 2 year waiting period.
Ken Mascia 02.17.10 at 2:12 pm
Hi Drew,
FNMA and the mortgage industry define a Pre-Foreclosure sale and a Short Sale as the same thing. If there is a deficiency, meaning the loan was not paid in full (short sale), then it’s my understanding that Fannie Mae will require 2 years before an applicant is eligible for purchase by FNMA. The truth of the matter is that Fannie does not approve loans, it just sets the rules for loans that it will purchase from banks and wholesalers. Banks and wholesalers, who actually approve mortgage loans, are currently requiring a minimum 2 year waiting period for any short sale. So regardless of what FNMA’s rule is it will be difficult to obtain a loan immediately after a short sale.
Robb 02.24.10 at 10:00 pm
There is a lot of usefull information here. Unfortunately I have found
myself in the same situation after twelve years in my home. Hopefully
Fannie and Freddie will come up with better alternatives for people like us in the near future. It is not like a few people. There are millions of effected homeowners that were on track until risky behavior began
on wallstreet and in the banking industry. Hard working, tax paying,
law abiding citizens have been put at risk because of greed and then we bailed them out so their bounuses could stay intact. I did not want to rant
but I as well as many more have lost a lot. It will get better. Thanks!
Robb
Julie 04.16.10 at 11:14 am
I sold my home as a short sale 2yrs ago, my husband and I were going through a divorce and I couldnt make the payments on my own. I was advised to stop making payments in order to get approval for my short sale. At the time of closing they said I would have to wait for 2 yrs before I could buy a home again. In the mean time i’ve paid off all my debt and my credit score is great, but when I went to get a new mortgage the lender said that there is now a 3yr wait after a short sale. So I guess I just want to know does that 3yr wait apply to everyone regardless of when you sold your home?
thanks for you time,
Julie
Ken Mascia 04.16.10 at 11:58 am
Julie,
The guidelines are a bit fluid this year because changes are occuring constantly, but, right now 3 years is what you’re going to be held to. Keep your credit strong and you should end up in good shape.
Lora 04.24.10 at 2:52 pm
Me and my husband need to move due to a job transfer. We have a FHA loan, and are in the process of a shortsale. FHA states that you have to be 31 days late in order for a shortsale to be approved, so here we are never missed a payment in our lofe, have great credit, and now we have to be late on our home loan, and thus cannot get another FHA loan for 3 years due to the fact that you have to be late on a FHA loan inorder to shortsale. We have done everything right paid ours bills on time, have great credit, but need to shortsale due to the upside down market. Please let us know if there is anything missing that could get us into a loan faster. Thanks so much!!
Chris 05.09.10 at 2:40 pm
I have a virtually identical situation as Julie above and am at the two year mark now. My credit score is back over 710, I have good income and little debt and read in various places on the internet (and earlier in this thread) that Fannie Mae is a 2 year guideline after a short sale in which the borrower was delinquent. In your reply to Ken on 02/17/10 you said “Fannie Mae will require 2 years before an applicant is eligible for purchase by FNMA” yet in your reply to Julie on 04/16/10 “right now 3 years is what you’re going to be held to”. Is it two years or three years? Did regulations change between February and April? If so I can’t find anything about it on the internet. I have no problem waiting three years if that’s what it is but if I may be eligible after two and wait three, and prices go up, I’m going to feel like an idiot. Can you shed any light on this? Both BOA and Wells have told me three years with them but the loan officers didn’t seem real certain about the guidelines.
Ken Mascia 05.10.10 at 10:01 am
Chris, the bottom line here is that FHA, FNMA and FHLMC do not make rules for what is approvable and what is not and they are not lenders. They issue “guidelines” under which loans made by lenders will be purchased by them. Lenders (banks and mortgage companies) can make loans under any terms that they want, so each individual lender makes the rules for loans that they will make. As a result there can be differences between what one lender may find acceptable and another won’t. I am seeing most banks requiring a minimum of 3 years after a foreclosure or shortsale but as mentioned that is not an umbrella requirement.
Susan@Short Sale Process 07.28.10 at 7:54 pm
Nice clarification on new mortgage loans…. This needs to be broadcasted to all Realtors
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