This post was originally published on February 16th, 2001. However, it’s still very timely. 😉 Enjoy a past post.
Depending on which area of the US you live in, short sales seem to be increasing in neighborhoods; especially in the Southwest. No matter what the reason for the short sale is, i.e. job loss, increased mortgage payment, or underwater home loan, this seems to be a growing trend in the housing market. I personally know someone who is in the middle of a short sale, or strategic default as lenders like to refer to it as.
And a burning question among these home owners seem to be; When can I buy my next home?
For people who have never experienced this problem, or who sat on the side lines during the housing boom and were just fine renting, the idea of buying a house after a short sale seems a bit rash and irresponsible. I’m not usually one to judge people for their actions, but if you’re in the middle of short selling your house and are already talking about buying a bigger, nicer home within the year, it just seems a bit…well, wrong. It’s hard for me to believe that a bank would be eager to lend money to a person who just shorted another bank hundred’s of thousands of dollars. But what the heck do I know? I’m just a renter.
My curiosity on this subject prompted me to research this topic and find out just how soon a person could obtain a mortgage after a short sale. After some research, the answer isn’t very cut and dry; it depends on where the new loan will originate:
- Fannie Mae and Freddie Mac – With a decent credit score and a 20 percent down payment, a person is eligible for a mortgage two years after a short sale. Of course, the key here is maintaining a good credit score and making sure you have a down payment. After four years, you only need a 10 percent down payment. Though I wouldn’t bank on Fannie and Freddie four years from now since the Obama administration just presented a plan to dissolve these two entities over the next several years. Update: Scratch that. I’m pretty sure they’ll still be around, but you better make sure you have some sort of down payment.
- Federal Housing Administration – With a good credit score a person is eligible for a mortgage through FHA within three years (or longer) of a short sale. However, there are some extenuating circumstances that would allow you to purchase a home right away, but this is difficult to prove and you have to have been current on your house payments for 12 months up to the short sale (almost impossible because most banks won’t short sell your home until you default on a payment, making this a bit of a catch-22).
- Conventional Loan – I’ve found varying answers to this one, anywhere from 1 year to many years. Again, most banks will want to see a decent credit score and a down payment.
There are some situations out there that warrant short selling a home such as becoming unemployed and/or being offered a job position in another city or state, or health issues or a death in the family. All of these circumstances are understandable since they are out of the control of any one person. Actually, the FHA will grant a home loan right after a short sale for exactly these reasons.
But if you’re trying to take advantage of the market, as in you are no longer happy with the price you paid for your home and now want to purchase a bigger, nicer home for half the price, you’ll have to wait a little while.
Are you in the process of short selling your home? Are you doing so because you have to, or you just want to (very different reasons)? Is it fair to ask for a wait period and a down payment?