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Rebuild your credit and secure a mortgage after a short sale

Rebuild your credit and secure a mortgage after a short sale

After selling your house through a short sale, often people ask themselves, “I had a short sale, but when can I get another mortgage?” If you are considering a short sale, or you have already gone through one and are wondering when you can expect to be able to buy another house, there are certain things that you need to do in order to establish or build your credit enough so that your next mortgage is more easily obtainable. Here is some expert advice on securing a mortgage after a short sale and understanding what it means to you and the lender.


Do

Do know what constitutes a short sale

A short sale is when you sell your home and the lender agrees to accept less than what is owed on the mortgage. A short sale is not the best option, but often it is the only option so that you don’t end up having to go through a foreclosure.

Do know why a lender would choose a short sale

Since 2007, home prices across the United States have dropped dramatically. Many people who purchased a home since 2000, found themselves underwater in terms of what their house is worth compared to the balance on their mortgage. Then came the great recession and the unemployment rate skyrocketed and more than 10% of the work force found themselves unemployed. Many homeowners could no longer make their mortgage payment and the banks started foreclosing in record numbers. When a bank takes back a home as a result of foreclosure, it is a very expensive proposition. First of all, the homeowner is generally at least four months behind on the payment. Secondly, the lender has to hire an attorney to file and get the home back. Thirdly, the house is generally neglected and requires money to rehab. Lastly, lenders do not wish to be property managers. When they take a home back, they have to insure the property as well as pay for utilities and taxes. So a short sale can be a better alternative for both the lender and the owner of the house to avoid foreclosure.

Do know the benefits of a short sale to the lender

Short sales benefit the lender for several reasons. They reward the homeowner by allowing him to settle the debt without having to go through a foreclosure. In order to do so, the homeowner can stay in the house, but needs to keep the house in good condition. The homeowner will also be involved in the sales process. This helps the bank in several ways as they don’t have all the expenses mentioned above such as the foreclosure filing, holding cost, and repairs. They will lose money on the deal since they are not getting the amount owed returned to them, but they don’t have to take back the property and resell it later.

Do know the benefits of a short sale to the homeowner

Short sales also benefit the homeowner because it allows them to avoid foreclosure. A foreclosure is definitely a black mark on a person’s credit. If you had a prior foreclosure, you will have a certain waiting period depending on the type of loan. There are many Jumbo products that will not lend to a person who has had a previous bankruptcy or foreclosure as long as it shows up on your credit report, which could be up to 10 years.

FHA allows you to get another loan 3 years after a foreclosure, while Fannie Mae and Freddie Mac (conventional loans) require 7 years. By doing a short sale, FHA is currently treating a short sale as it was a foreclosure and you need to wait 3 years. Conventional loans look at it differently and allow someone to get another loan 2 years after a short sale if they put 20% down, wait 4 years if they can put 10% down, and 7 years with less than 10% down. A VA loan currently has the shortest waiting period needing only 2 years after a short sale or foreclosure.

Do work to rebuild your credit

Once the short sale is over, it is very important to start rebuilding your credit. Go to and download a free copy of your credit report. You can do this each year for free at Annual Credit Report’s website. Look through your report and if anything is incorrect, work to fix it. The two main contributors to your credit score is payment history and credit utilization. A lender will not want to see any delinquencies after a major derogatory such as a bankruptcy, foreclosure or short sale. The way credit works, if you are late this month, it really hurts your scores. Once the late payment starts to age and it becomes 6 or 12 months from now, it hurts you a lot less.

The next item is your credit utilization. This looks at the types of credit you have. It is important to have at least one credit card and two or three is better. Try and keep your balances below 50% of the high credit limit - under 30% is best. The last thing to do is try and save up as much money as you can. You will need to paint the best picture possible when you are applying for a loan. So the sooner you can start rebuilding your credit and getting your financial house in order, it will definitely help you in the long run.


Don't

Do not ruin your credit after a short sale

If you go through a short sale, the best advice is not to be late on any other of your bills; this includes credit cards, installment loans and/or bills that you disagree with. If your cell phone company sends you a bill for $50, don’t ignore it. When you go through something like a short sale, you need to paint the best picture possible. An underwriter needs something to feel good about, and good payment history is extremely helpful.

Do not go into denial

After something negative happens to us, a natural reaction is to try and forget about it. You need to embrace that this has happened and begin to reestablish your credit. Look it over your credit report diligently and see if any other accounts are late or in collection. If so, get those accounts caught up. If you don’t have any open credit, start establishing new credit.

Do not think you can’t get credit

Most banks will allow you to open a secured credit card. This is where you put the amount of your credit line into an account with the bank that you can’t touch and it serves as security in case you don’t pay. Once you have one and use it correctly, your credit scores should start to improve.

Do not think a short sale is your only option

There are a few things to consider when deciding if you want to do a short sale on your home. First of all, is the lender going to work with you? If they are not, which some are unwilling, then it might not be worth your time. Second, you need to make sure you have a strong team behind you that will be able to sell you home quickly. If that is not in place, you will be wasting your time. Lastly, you can always let you home go back to the back via foreclosure. Sometimes this is your only option. Main thing is if you have to let the house go, put together a plan on how you are going to get your credit back on track. A foreclosure is one of the most damaging items that can be on a credit report, but like anything, time heals all wounds.


Summary
Jumping cartoon

Selling your house as a short sale can be a very overwhelming task even 3 years after. But in order to make it less stressful, and not ruin your credit for a long period of time, there are definitely things that you can do in order to make sure you can still secure a mortgage and buy a house when you and your credit are ready. Always remember that having to sell your house through a short sale isn’t the end of your life and it doesn’t mean you won’t ever be able to buy another house again - establish your credit, and always pay your bills on time.


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Photo Credits: stop foreclosure with short sale by Flickr: Michael Ramsay; Check Man, Cross Man and Jump Man © ioannis kounadeas - Fotolia.com

George BeylounyBranch manager

George Beylouny is the Branch Manager for Silverton Mortgage Vinings, a residential mortgage company located in the Vinings area of Atlanta. George has been in the mortgage and real estate business for more than 10 years. Along with the day to d...

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