Homeowners who find themselves owing more on their mortgage than their house is worth sometimes go through a short sale to avoid foreclosure. Selling a house for less than the amount due on the mortgage can let the homeowner escape a difficult situation and start over.
If you sold your home in a short sale, that will be noted on your credit report for several years. Although you may face challenges if you want to buy another house, it is possible to get preapproved for a new mortgage.
How a Short Sale Can Affect Your Credit
A short sale can hurt your credit score, but not as much as a foreclosure can. Check your credit report to make sure that your lender reported the short sale accurately. Inaccurate reporting can cause your credit score to take more of a hit than it should.
Your broader credit history is also important. If you have other derogatory items, such as late payments or a bankruptcy, on your credit report, it will be more difficult to get your score back up high enough to qualify for a new loan.
You May Have to Wait to Seek Mortgage Pre Approval
The amount of time you will have to wait to buy another house will depend on the type of mortgage you apply for. You may have to wait two to four years to take out a conventional loan, depending on how much money you can put down.
You may be able to qualify for Federal Housing Administration (FHA) mortgage right after a short sale if you weren’t in default on your previous loan at the time of the short sale, and you made all your mortgage payments on time in the 12 months before the short sale. If you don’t meet these criteria, you may have to wait three years to seek an FHA mortgage, unless you defaulted on your loan due to extenuating circumstances, such as divorce, job loss or the serious illness or death of a family member who was the primary wage earner. For other types of government loans, waiting periods vary.
You may be able to get preapproved for a non-qualifying mortgage right after a short sale since those types of loans have flexible underwriting criteria. The tradeoff is that you will have to make a substantial down payment and pay a higher interest rate than you’d pay with a different type of loan.
Rebuild Your Credit So You Can Buy Another House
After a short sale, you may be unable to qualify for a mortgage with a competitive interest rate. Pay your bills on time each month, keep your debt-to-income ratio as low as possible and save money for a down payment so you can get pre approved when you’re ready to buy a new house. Remember that a lender will check your credit again shortly before closing.
