Putting your upside-down home on the market and going through the tedious process of a short-sale in Southern Maryland does not always mean you are free to move on to purchase a new home right away. As always, guidelines vary from bank to bank–but in general, here’s somethings to bear in mind:
No one will allow concurrent settlements (back to back) when a short sale of your previous home is involved. It seems the dust must settle so the underwriter can ascertain whether the liability is satisfied in full, and how the mortgage(s) will be reported to the bureaus. So with that being said, here’s how it breaks down between different loan programs.
Conventional loans, in general, require at least two years to elapse IF there are ‘extenuating circumstances’ involved with initiating the short-sale. ‘Extenuating circumstances’ can be classified as loss of job or income, unforeseen medical conditions, death in the family, etc…in general, events that are out of the borrower’s control which forced them into short-sale position. You can be creative as you want to what constitutes an ‘extenuating circumstance’, but ultimately it will be up to a human underwriter to determine whether the circumstance meets that criteria. Selling the home to take advantage of a depressed market, etc. will not fly.
If the situation was NOT an extenuating circumstance, then most banks are requiring at least FOUR years to elapse before being eligible to purchase a new home. But again, remember, banks have different criteria for what they look for, and each may have their own overlaying guidelines.
FHA loans are a little more lenient in regards to prior short-sales. The borrower is eligible if:
- An extenuating circumstance exists
- No lates on the mortgage 12 mos. prior to the sale, and
- The proceeds of short-sale serve as payment in full.
So that’s good news right…BUT, the borrowers are NOT eligible if:
- The borrower is seen as trying to take advantage of declinig market conditions (vague?), or
- The borrower purchases, at a reduce priced, a similar or superior property within a reasonable commuting distance.
So in essence, the borrower can’t go down the street and buy a similar house at a reduced price, shedding the excess mortgage in the process.
Also, bear in mind, if the short-sale is done on a FHA loan, chances are HUD has paid an insurance claim to the bank to cover their losses. And if that happened, there is a 3 year waiting period. Once HUD pays a claim, the social security is tagged with a CAIVRS alert, meaning no FHA loan for 3 years.
VA has not instituted any clear-cut rule in regards to short-sales YET. They want the underwriter to look at the overall quality of the loan. And if a short-sale exits on the credit history, the underwriter must make a determination whether the borrower is credit worthy based on the explanation and documentation of the circumstances. Easy enough. But beware, even if VA is OK with a short-sale on the credit history, some banks mandate policies of their own. Also VA is never OK with multiple lates on a mortgage within the last 12 mos.
Short sale or no short sale, I can’t stress enough, the mortgage history ultimately is the trump card on every credit report. So if the mortgage was severely delinquent prior to selling the home, then the borrower will be waiting 3-4 years anyway in order to re-establish good a credit rating no matter what loan program they apply for.
But for those of you who paid their mortgage loan on-time up to the point of sale, and have extenuating circumstances well-documented, renewed home ownership might be right around the corner.