How to Get a Mortgage After a Short Sale

What Is a Short Sale?

A short sale is when you sell your home for less than what you owe on your home loan. That means you won't make enough on the sale to pay off your outstanding mortgage balance, but your lender may allow it if you can no longer afford your payments. That might be the case if you're experiencing financial hardship or your payments are already past due. Short sales should be considered a last-resort option that could help you avoid foreclosure.

The proceeds from the short sale will go directly to your lender. But be aware that you may have to cover the deficiency balance, which is the difference between the final sale price and what you owe on your mortgage.

A short sale will appear as a negative entry on your credit reports. As a result, you'll likely see a drop in your credit scores—especially if there were any missed mortgage payments leading up to the sale. Having said that, the credit score harm associated with a short sale is less severe than that of foreclosure. A short sale might remain on your credit reports for up to seven years and make it difficult to qualify for another mortgage, at least in the short term.

How to Get a Mortgage After a Short Sale

Having a short sale on your credit reports is less than ideal, but it's still possible to get a new home loan. Below are some tried-and-true strategies that can help show lenders that you're a trustworthy borrower.

Rebuild Your Credit Scores

The first order of business is repairing your credit. Consider the following action items after a short sale.

• Continue paying your bills on time. Your payment history is the most important factor in determining your FICO^® Scores^Θ, accounting for about 35% of the calculation. Making on-time payments month after month can help improve your credit. The opposite is also true—late payments will likely damage your credit further.
• Pay down your debts. Your credit utilization rate is the percentage of available credit you're using on revolving credit such as credit cards. Once it hits the 30% mark, it will likely start negatively impacting your credit scores more severely. Having a lower credit utilization rate suggests to lenders and scoring models that you know how to manage your credit effectively.
• Avoid opening new accounts. New accounts bring down the average age of your accounts, shortening your credit history and potentially limiting your credit growth.
• Get credit for paying other bills. With Experian Boost^®ø, you can add certain payments to your Experian credit report, including your utilities, cellphone bill and even some streaming services. Consider it another opportunity to improve your credit scores.

Learn more: Tips to Improve Your Credit Score

Show Steady Income and Employment

When you're applying for a mortgage, the lender will want reassurance that you can afford your new monthly payments—especially if you've had a previous short sale. Having steady income and reliable employment is critical. Be prepared to provide supporting documents like W-2s, bank statements and tax returns. You may need to take extra steps to confirm your income if you're self-employed.

Save for a Bigger Down Payment

The larger your down payment, the less you'll have to borrow from your mortgage lender. That reduces the risk for the lender and can show that you're financially invested in the purchase. You'll also have more equity in your home from the get-go.

Choose a Lender That's Familiar With Short Sales

Before applying for a new mortgage, do some research and zero in on lenders that are well-versed in short sales. A lender that's familiar with the process may be more willing to work with you, especially if you've taken steps to improve your financial situation. You might consider:

• Seeking recommendations from local real estate agents
• Researching large mortgage lenders that specialize in short sales
• Asking potential lenders about their requirements for borrowers who've gone through a short sale

How Long Is the Waiting Period After a Short Sale?

If you've gone through a short sale, you'll likely need to wait before applying for a new mortgage. The waiting period varies based on the type of mortgage you're seeking and the situation that preceded the short sale.

Can You Get a Mortgage Before the Waiting Period Is Up?

The typical waiting periods mentioned above aren't necessarily set in stone. There are a few extenuating circumstances that might shorten your wait time and allow you to get a new mortgage sooner. It depends largely on the type of mortgage you're applying for.

• Conventional loan: The waiting period may be two years, instead of four, if your short sale was due to an extreme financial situation that was out of your control. Situations could include a divorce or severe medical illness that prevented you from working.
• FHA loan: There may be no waiting period with loans guaranteed by the Federal Housing Administration (FHA) if you made all your mortgage payments and other installment debt payments on time within the year leading up to the short sale. But if you defaulted on your original mortgage, you'll typically have to wait three years to apply for an FHA loan. It might be shorter if a serious extenuating circumstance preceded the short sale, such as the death of the household's primary breadwinner.
• VA loan: If your previous mortgage was paid on time prior to the short sale, the two-year waiting period might be shortened for loans backed by the Department of Veterans Affairs (VA).
• USDA loan: If you have a credit score of 640 or higher, you may not have to wait the full three years to qualify for a U.S. Department of Agriculture (USDA) loan.

The Bottom Line

No homeowner wants to go through a short sale, but it may be a last-ditch effort to avoid foreclosure. Just know that there will likely be a waiting period if you want to get a new mortgage after the dust settles. In some cases, a strong credit score could help you get approved faster. Getting a read on your credit is an important step—and you can check your FICO^® Score and credit report for free from Experian.