The answer to this question varies depending on the loan program a buyer is looking at, but most buyers who have past credit problems rely on FHA loans as their fastest track back to homeownership. This is due to FHA’s lenient credit guidelines compared to conventional loan programs. UPDATED: For guidelines on other programs, please scan to the bottom of this page.
HUD (The Department of Housing and Urban Development) just released updated guidelines on the very topic on December 16th, 2009 in their Mortgagee Letter 09-52. This mortgagee letter specifically covers FHA guidelines for buyers who have sold their property for less than what they owed.
The new FHA guidelines say a buyer cannot buy for 3 years if they were delinquent on their previous loan leading up to the short sale. This timeline is identical to FHA guidelines on a foreclosure.
The guidelines do say a homebuyer can buy immediately following a short sale IF they were current on their mortgage and other installment debt payments at the time of their short sale and if the proceeds from the short sale were accepted as a payment in full. In other words, if you were not late and the bank accepted your sale, you can buy again.
HUD does say that you cannot buy using a FHA loan if the purpose of the short sale and new purchase were done to take advantage of declining market conditions or to purchase a similar or superior property at a reduced price. In other words, don’t abuse the guidelines to get a better deal.
To sum up the guidelines, you can buy immediately after a short sale but you cannot have been late on your loan and you can’t buy if your short sale was done to benefit from current market conditions. Which scenarios would this apply to? Here’s a few that would fit the requirements:
- You are forced to move do to a new job and location. You have to sell your home and you owe more than it’s worth.
- You cannot afford to keep your home, such as losing your job, and were able to sell your home before becoming late on the home loan payments. You then buy again when you have a new job and can afford the payments
- You have a balloon payment due and cannot afford the payment. You sell for less than what you owe due to market conditions and later buy.
Here are the seasoning requirements for all programs:
FHA- 3 years. Circumstances allow less than 3 years if the homeowner wasn’t late during the shortsale or circumstances were outside the homeowners control.
Conventional- 2 years with 20% down, 4 years with 10% down or 7 years with no restrictions This is on page 451 of the Fannie Mae seller guide-https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel022812.pdf
VA- 2 years as the VA states they treat foreclosures the same as bankruptcies for seasoning. Short sales aren’t bankruptcies but since the VA reviews mortgage history in the last 2-years very closely, I don’t see them releasing updated guidelines other than adding verbiage stating short sales are included.
Chapter 4 of the VA handbook
USDA- 3 years unless USDA’s underwriting engine (GUS) approves you sooner. Typically 2-years with re-established credit. The USDA handbook has specific guidelines for debt that is paid off for less than what is owed, which a defaulted short sale falls under. I’ve found that GUS typically approves a client after 2-years of re-established credit but sometimes sooner.
Chapter 4 of the rural housing handbook