Homeowners are building equity now in many cases, but what about those who opted to short sell (selling a home for less than what was owed on the mortgage?)
There were many who could no longer make their mortgage payments and were on the verge of foreclosure. They basically had four options: let the home go into foreclosure; negotiate a short sale with their lender; rent the house out for the mortgage payment; sell the home and personally pay the shortfall to the lender. Many opted for the short sale – an agreement with their lender to sell the home at a loss instead of being foreclosed upon.
For those who chose the short sale option, there is hope for buying a home again. Generally, short sellers can buy again after a two-year period from the completion of the short sale; foreclosures require a five to seven-year wait period.
This, however, can be a moving target as many lenders’ policies vary (along with interest rates and discount points.)
Typically, to get a conventional loan after a short sale, a borrower should have a FICO score of 680 or over. With 20 percent down, the wait period is two years; 10 percent down, four years; less than 10 percent, seven years. Credit card debt should be below 30 percent of allowed credit.
To get an FHA loan after a short sale with delinquent mortgage payments, there is a three-year waiting period from the short sale closing date, However, home buyers who qualify for the “Back to Work” program – documenting an economic hardship that derailed earnings by at least 20 percent or more for at least six months – may be able to get a loan with as little as 3.5 percent down (FICO above 650.)
An application for an FHA loan can be submitted shortly after a short sale closing as long as there was no default judgment recorded. Credit scores above 580 may qualify; credit scores under 620 may be manually underwritten. Debt-to-income ratio should be below 43 percent of total household income. Credit card debt should be below 25 percent of credit available.
Eligible veterans can get a Veterans Administration loan with a two-year wait period; and they can still get in with no money down in some cases. Exceptions to the wait period are made if mortgage payments were current up to the date of the short sale; credit score must be at least 660.
One of the most common challenges for the short seller is the credit report. There are three credit-reporting bureaus: Equifax, TransUnion, and Experian. Free reports are available and errors should be corrected. Generally, there are two types of scoring systems: FICO and VANTAGE. These vary due to types of software, data/algorithms, industry base and type of credit and can differ greatly. FICO scores range from 300-850; VANTAGE scores range from 501-990. VANTAGE is commonly used in online sites. It is a good idea to have a lender generate a report ahead of the purchasing process.
In some cases, the short sale lender may have incorrectly reported the sale as a Foreclosure; this is problematic since borrowers with foreclosures must wait up to seven years to become eligible for a conventional loan. Credible credit repair agencies can help with this situation as well as help rebuild credit ratings. Paperwork from the short sale transaction will also help prove that it was not a foreclosure.
Keeping accounts current and paying on time is critical. Also the length of credit history on these accounts is important in rebuilding credit scores. Revolving credit or secured credit cards can help re-establish or build a good credit history.
It is advantageous to work with lenders and realtors who are knowledgeable and experienced with short sellers re-entering the real estate market. The market changes signal an upswing in the economic outlook; there is hope for short-sellers who were caught in the downswing.