After a short sale, when can I buy another home using a VA, USDA, FHA, or conventional loan?

From 2008 through 2016 many homeowners suffered great financial difficulties.  On top of situations such as job loss and medical issues, many home values decreased dramatically.  Therefore homeowners were not able to sell their home since they were underwater.  This is why a short sale was so popular during this period.  Lenders basically agree to accept an amount lower than the mortgage balanced owed.  While this is considered a big credit delinquency, it isn’t the end of the world.  A knowledgeable buyer can purchase another home in a very reasonable amount of time.

How to Get Approved After a Short Sale

When someone goes through a short sale, what happens after the fact is very important.  First of all, have a good written explanation along with any supporting documentation.  It is paramount to show why this situation was a one-time incident and the buyer is considered a good risk now.  After the pre-foreclosure sale, a buyer should pull all 3 credit bureaus at least once per year.  This is to verify everything is reporting correctly to limit the chances of surprises at time of future application.  Excellent, new re-established credit for at least 12 months, preferably more, after the short sale is imperative.  This shows a lender that the buyer has recovered after the short sale and can pay his/her bills as agreed.

Short sale guidelines for USDA, VA, FHA, conventional loans

Paying rent and other types of credit such as loans, credit cards, or lines of credit will be reviewed.  Make sure to know and document the actual closing date of the short sale.  That is when the clock starts ticking.  Different mortgage products have varying requirements for time elapsed after a short sale.  Although, just because the time requirement has been met, the credit scores and overall strength of the file is also important.

VA Loan Short Sale Requirements

Generally, VA has a requirement of 2 year minimum for a short sale or foreclosure.  This also is the same as the straight liquidation bankruptcy guideline.  Although not probable, it is possible for approval as short as 1 year from the short sale.  But it must be because of extenuating circumstances and there must be sufficient and good re-established credit though.  VA, like other mortgages, has its own definition of extenuating circumstances.  It must be beyond the control of the applicant or spouse.  Examples include unemployment, prolonged strikes, medical bills not covered by insurance, and each must be verified.  Divorce is not generally viewed as beyond control of the borrower though.

FHA Loan Short Sale Requirements

Generally, FHA will not allow a short sale within 3 years of the new FHA case file number.  But there are possible exceptions to the 3 year rule.

The first exception allows for FHA approval if the borrower was current when the previous sale occurred.  Not only must the mortgage be current at the time of sale, but it should also be on time for the preceding 12 months.  Plus installment debt payments for the same time period must also be on time.  This could allow a buyer to purchase a home immediately after the short sale!

The next potential exception is for a sale because of extenuating circumstances.  These circumstances must be beyond the borrower’s control.  Examples include a serious illness or death of a wage earner.  But the borrower must have re-established good credit since the event.  FHA specifically mentions that divorce is not extenuating.  There could be an exception if the mortgage was on-time at the time of the divorce, the ex received the property, and then there was a subsequent short sale.  Also not being able to sell a property because of a job transfer or relocation is not extenuating.

Fannie Mae & Freddie Mac Conventional Loan Short Sale Requirements

Can be as short as 2 years up to 90% of the purchase price depending on circumstances and the automated approval.

Fannie Mae and Freddie Mac conventional loans require 4 years from the pre-foreclosure sale through the disbursement date of the new loan.  Although it could be as low as 2 years if the reason was an extenuating circumstance.  This must be explained and proven.  Plus it is at underwriter’s discretion.

 USDA Loan Short Sale Requirements

USDA guidelines in handbook 1-3555 states that a pre-foreclosure sale or short sale of a primary residence must not be within 3 years of the USDA commitment.  Subsequently, the borrowers must have re-established good credit and rent history to qualify.  There are potential credit exceptions if the lender’s underwriter believes the previous issues were a temporary situation.  This means out of the borrower’s control and the issue has been resolved.  Additionally there must be at least 12 months of re-established credit.  Another potential exception includes the new loan significantly reducing housing expenses.  Significant reduction means 50% or more in lower housing expenses.  Finally if the mortgage was current at time of the pre-foreclosure sale or current at time of divorce, there could be an exception.

Jumbo Loan Short Sale Requirements

A short sale is not allowed prior to obtaining a jumbo loan.  A jumbo mortgage is when the loan amount exceeds the county conforming loan limit.

Keep in mind that just because the required time has elapsed, it doesn’t guarantee approval.  Other factors still are important such as re-established credit.  Furthermore the borrower must have solid employment, sufficient assets, and rent history.  Also remember that there are ways to open lines of credit right after a short sale.  The sooner one starts to re-establish, the easier qualification will be down the road.

Guidelines for the above come from VA, USDA handbook 1-3555, HUD 4000.1, Fannie Mae, and Freddie Mac.

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Written By: Russell Smith