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?
Wow, you’ve uncovered something pretty important. I can’t believe that FHA/Fannie/Freddie (ha! yeah I can) would purchase mortgages of those who so recently walked away from a home.
I’d be interested to see what the “jumbo” market thinks of this, since that’s completely free of government involvement as far as the actual source of cash goes. I’m sure its a very regional thing, too.
As for short sales and walking away from your home, I say only this: The contract says pay up, or give up the home. You can do either and be within the confines of the contract, but I’m not so sure that walking away is the most “ethical” thing to do, nor am I sure that it makes for good financial sense (assuming, of course, you can afford the home without walking away).
@JT McGee – I was pretty surprised it was such a short amount of time as well, but it’s not a definite guarantee. It’s just the minimum amount of time they can apply for a new loan.
Just like JT, I’m surprised that the time horizon to get another house isn’t longer.
I have done the opposite. I bought a house in 2005 and I’ve been paying extra on it, so that if I ever need to sell I don’t have to write a check at closing. A short sale never even occurred to me.
@FirstGenAmerican – I was shocked as well, but it’s one reason I decided to research it – someone I know is hoping to buy a house right away and I thought that was absurd, so I researched it. Two to 3 years is the minimum amount of time, but it doesn’t guarantee that a person will get a loan the first time they apply.
If circumstances warrant a short sale, go ahead. But for those trying to game the system, the penalties should be harsher.
@IPA – That’s too bad that because your bank didn’t direct debit your account on time, it’s showing as a late payment. I’d have to say that short selling a home makes sense if you’re moving out of state or one of the primary income earners looses their job. My curiosity on this subject was prompted by someone I know short selling because they are now unhappy with the amount they paid for their home, which I think isn’t the best reason to short-sell.
Nice writeup! Previously, I thought that the stategic defaulter would buy a new home first, then walk away from the original house, but what you say makes more sense!
Although, I bet a small percent do it the way that I suggest too.
@Money Reasons – You bring up a good point but I don’t think a person working on short selling their home can buy another home before the short-sale has gone through. I could be wrong on this, but I think I read that there are some rules and regs that don’t allow a person to do this. Though this is a curious point that I might have to investigate further.
I’ve always wondered about this, so thank you for doing the leg work to find out. The only question I have remaining is if a short sale affects your credit score or not.
We were able to refinance our underwater home before it got too bad, so we’re in it for the long haul now. But I always wonder what would have happened if we went the short sale route. I guess I’ll never know now :). I’m also glad we can say we stuck with our commitment.
@Lindy Mint – Everything I read mentions that is usually affects a person’s credit score if the person was late on a payment. The tricky part is that most banks require you to have one late payment to qualify for a short-sale, making this a catch-22. So, I guess the answer is yes, it will affect a person’s credit score but by how much I’m not sure. I’m glad to hear that you were able to work with your bank and refinance your home. I think that this is a better alternative than short-selling, especially if you know you’ll be living in your city for a while.
Great thoughts little house. I dont think that people should be able to buy a house right after they short sell one, but then again, all I need to do to make that happen is make sure that I’m not lending them the money. If someone else wants to lend it to them, that’s their problem I would guess.
As far as buying one while in the midst of a short sale, I think that there is a huge aversion to rent right now. People think that other people are renting because they cant afford to buy or that they rent because they want to destroy the place. Renting is not a bad thing, but some people act like it is.
@Jeff @ Sustainable Life Blog
Renting isn’t a bad option if one plans on moving out of the area within a short amount of time or if renting is much cheaper than buying. I have a follow up post for tomorrow that offers a quick calculation that shows if it’s better to rent or buy. But you’re right, most people view renting as “bad.” I’m pretty sure this has something to do with the “American Dream” of owning a home.
My former neighbors are totally gaming the system. Both professionals and they up and left there home. It is listed as a short sale, and did so in a shorter time period than I expected.
2 years? That is ridiculous.
@Kris – That is pretty ridiculous. I don’t really understand the mentality behind being able to afford the house payments, but deciding to walk away from the house anyway. I can understand if it’s a decision based on economic hardship, but if neither spouse lost their job and they can afford their payments, I can’t understand why they’d want to mess up their credit and start all over again. Sounds silly.
I want myself a short sale! In fact, everybody should want themselves a short sale!
Help the economy and build one’s assets at the same time! 🙂
@Financial Samurai – Very funny, Sam. I think if you’re on the end of purchasing a short sale, that’s great – as long as the banks approve the sale (seems like many banks who hold the second mortgage just won’t play that game which makes the sale difficult.) I suppose I’d rather be on the buying end than the selling end!
2 years doesn’t seem like a very long time. Certainly not long enough to change your ways.
@Funancials – Two years is the “wait” period, but it really depends on the bank. Many banks may be too skittish to accept an offer from a couple who short sold only two years ago. Also, it makes improving your credit score in such a short amount of time a little difficult.
Thank you for this info, so it is really time and experience to buy a house after short sale.