When you've just lost your home to a short sale, the first thing on your mind is probably getting a new one, at least within the next few years. But few people are aware of the rules surrounding post-short sale mortgage and credit. Wait times, down payments, and rates of approval are all affected by your short sale, and more importantly, by your short sale credit score. Read on for some basic facts on getting a mortgage after a short sale.
How long do you have to wait?
For Fannie Mae and Freddie Mac-backed loans, you have to wait two years before taking out another mortgage. This wait time was recently reduced from five years. However, if you were not more than 60 days behind prior to the short sale, you do not have to wait the whole two years—you can get a new mortgage right away provided your post-short sale credit can get you decent rates.
Does a short sale affect your credit score?
Needless to say, your credit suffers a blow after you do a short sale, although it's not as drastic as a foreclosure. That's why experts recommend waiting two years even if you're part of the exception mentioned above. A bank may decide to give you a loan, but offer higher interest rates to make up for the risk. To get optimal mortgage rates, try to bring your credit score up to at least 680. This way, even if the short sale is still on file, lenders can see that you've stabilized enough to afford a new home.
What kind of loan can you get after a short sale?
The new Fannie Mae and Freddie Mac rules allow you to get a new mortgage after two years with an 80% loan-to-value ratio. This means you need to make at least a 20% down payment (your bank finances 80% of the home price). After four years, the maximum ratio goes up to 90%, meaning you can make just a 10% down payment.
How do you get better rates?
Besides a good credit score, you also need a steady payment history and a good credit ratio to get reasonable mortgage rates. The short sale will stay on your credit report for a while, so it's important to make up for it with positive marks. Pay off any debts you still owe to lower your debt-to-income ratio to the ideal 31%. Get credit reports from all three credit bureaus and fix any errors if necessary.
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