Short-Sales:  What you should know

Are you one of the millions of homeowners who short-sold a house in the last few years?  If yes, starting Aug. 16, you may have to wait longer for your next chance at home ownership. 

What is a short-sale?  Well, simply put, short-selling a property is selling a home for less than what is owed on the current mortgage note.  The reason it's called a short sale is because the lender is "shorted" the different between the current selling price and the amount of the original note. 

Short sales have nothing to do with how long these types of sales actually take to transact; the irony is they actually take longer to close than a traditional sale or even a foreclosure sale. 

Any time you short-sell a property, you can expect it to remain on your credit report for seven years, so it's critical you maintain other credit obligations to offset the negative credit effects of the short sale.

The upcoming change

As it stands, you can buy a primary home, second home/vacation property or even an income property with 20 percent down just two years after a short sale.  However, the waiting time to obtain a new mortgage will increase from two years (with 20 percent down) to four years with 20 percent down. 

This change will affect home-buyers whose loan applications are dated Aug. 16 or later.  So what does this mean in the real world?  It could mean devastation for home-buyers.  Consider the following example:

 

A potential home-buyer is currently house-hunting, is pre-approved with a conventional mortgage…but they have a previous short sale just two years ago.

That home-buyer will have three choices:

1.     Wait two more years, earmarking the upcoming four-year waiting time frame.

2.     Wait one more year to procure a Federal Housing Administration loan

3.     Get into contract immediately or, if refinancing, apply for a mortgage prior to Aug. 16.

The new “wait times”

Other factors usually come into play during a short sale such as the possibility of a bankruptcy or another property with occupancy concerns.

Here are the waiting times when seeking a new mortgage with consideration to most credit issues.

Conventional loans

All conventional loans must go through Fannie Mae and Freddie Mac's automated underwriting system each lender uses when originating a new mortgage.

If you have a foreclosure: You'll have to wait seven years from the date the foreclosure was completed and transferred back to the lender to the date of the credit report. 

You can be eligible for a conventional loan three years after foreclosure with extenuating circumstances — such as death of a wage earner, illness or job loss — however, the loan must still pass an automated underwrite, which red flags a previous foreclosure in the past seven years.

Short sale/deed in lieu-short sale: The lender agrees to accept payoff for less than what is owed on the note; the deed-in-lieu borrower assigns the title to the lender and avoids foreclosure.

• Seven-year wait with less than 10 percent down of primary residence
• Four years with 10 percent down on the purchase of a primary residence
• Four years with 20 percent down on the purchase of a primary, secondary or investment property purchase
• Two years with extenuating circumstances, only with 20 percent down

If a Chapter 7 bankruptcy borrower does not pay any debts owed, it's a four-year wait from the discharged date with the re-established credit and no other derogatory credit, but a two-year wait is possible only with extenuating circumstances.

If Chapter 13 bankruptcy debts are paid back through court order and scheduled payment plans, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction, it's a two-year wait with extenuating circumstances.

FHA loans

Foreclosure: It's a three-year waiting time to purchase a primary home from the date the foreclosure was completed and transferred back to the lender to the date of the credit report.

Short sale: Three years to purchase a primary home from the date of title transfer. 

Bankruptcy Chapter 7: Two years from the date of discharge to reestablishing credit with no derogatory credit. If a property is surrendered in the Chapter 7 bankruptcy, it is considered to be possible foreclosure, which could increase the waiting time. 

Bankruptcy Chapter 13: It's a one-year wait with a scheduled payment plan on your liabilities factored into debt-to-income ratio, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction. 

Department of Veterans Affairs loans (commonly known as VA loans)

Foreclosure: Two years from the date the foreclosure was completed and transferred back to the lender.

Deed in lieu: One- to two-year wait with re-established credit and acceptable extenuating circumstances.

Short sale: Two years from the date the previous sale closed and was transferred to the new owner.

Bankruptcy Chapter 7: Two-year wait. 

Bankruptcy Chapter 13: One-year wait with bankruptcy court approval to enter into the mortgage transaction.

In summary

As you can see, if you have had a previous short sale, in combination with any other lending risk factor, your waiting time to buy a house might be longer than you think.

Be sure to communicate with a lender who can give you accurate information that pertains to your particular credit situation. Lenders will look at each event and a first-in/first-out order when reviewing your mortgage application. 

The bottom line is, a previous short sale in the past few years may mean you must wait longer.  It is suggested to work with your real estate professional and your lender so they can help guide you.  If you've had credit problems in recent years and hope to buy a house soon, it's important fully understand your current credit situation.  Some may suggest that you pull credit reports to assess your overall situation (you can pull them for free once a year), noting any mistakes or derogatory items, and rectify those items in a timely fashion. It's also helpful to get in the habit of monitoring your credit scores to track your progress over time.

Some information gathered from www.credit.com