When Can You Buy a Home After Short Sale?

Have you ever owned a house and struggled with covering mortgage payments? One option that can help you get a fresh start and find mortgage debt relief is a short sale, when a lender accepts less than you owe on the mortgage and settles your debt.

When you come out the other side and catch your breath, you might wonder what’s next. Will you ever get to be a homeowner again? 

I’ve been through a short sale, and I have since bought another house. Here’s a closer look at short sales, their impact on your finances, and how to know when you might buy a home again.     

What Is a Short Sale?

If you’re experiencing financial hardship and unable to keep up with your mortgage payments, you might turn to a short sale to help you get out of your loan. Here’s how it works.

Your mortgage lender agrees to accept less than you owe

A short sale is a lot like other types of debt settlement. You ask your mortgage lender to accept less than you owe to close out your debt—this means selling your house for less than the remaining balance of your mortgage loan. The mortgage lender isn’t fully repaid all that they’re owed. They set the price and negotiate offers on your home, since you’re turning it over to them. 

What happens to the rest of your balance? The lender can either forgive the debt you still owe, or require you to pay the part of the debt not covered by the sale (this is called the “deficiency balance”). If you don’t repay it, the lender could send your account to collections. Even if your lender forgives the rest of what you owe, you may still owe taxes on it. 

Every situation is different, and we’re not tax advisors. This information is general but some of it might not apply to you. Please contact a tax professional to discuss potential tax consequences of less than full balance debt relief.  

You prove your inability to pay your mortgage

If you hope to get a mortgage lender to agree to a short sale, you need to explain your situation, and likely offer proof. 

Let’s say you’ve been laid off from your job, and are now collecting unemployment payments that are much less than your salary. As a result, you can no longer afford to pay your mortgage. This happened to me, and it’s why I sought a short sale. Your lender will probably want to see a copy of your termination letter, and possibly also bank statements showing that you are no longer earning enough to cover all your bills. 

A short sale may hurt your credit less than foreclosure 

You might be familiar with foreclosure, which is another possibility if you stop paying your mortgage. In a foreclosure, your lender repossesses your home—you don’t get to move out by choice, as in a short sale. 

Foreclosure’s impact on your credit is typically severe (on the level of filing for bankruptcy). Like other negative marks, it can remain on your credit report for seven years. 

But a short sale may have less of an impact on your credit if you sought help from your mortgage lender before you actually missed any payments. Let’s say you reached out to your mortgage lender before missing payments, explained your situation, and asked for a short sale. After seeing evidence of your financial difficulties, your lender agrees. In this instance, the short sale appears on your credit report as “settled” with a notation like “account legally paid for less than full balance.” 

But if you missed payments before your short sale (like I did), the credit impact starts with that first missed payment. If you had a higher credit score before the missed payments, you’ll likely see a much bigger impact, because you had farther to fall. Consequently, it might also take longer to bring your credit score back up to the range you need to consider buying a home again. 

When Can You Buy a Home After a Short Sale?

It’s certainly possible to buy another home after your short sale—I did. But a short sale is a major event for your finances, and may have a serious emotional impact on you to boot. I also dealt with a divorce (another big emotional and financial impact) at the same time. 

Getting ready to buy again after a short sale looks a lot like recovering from other types of debt settlement. It took me six years after my short sale was finalized to even consider buying a home again. Thankfully, my credit was back to being good by then. But before I was ready, I still had to pay off a lot of high-interest debt and save money for all the costs of homeownership. 

Here are some of the factors you should consider.

Waiting periods for a new mortgage

Generally, there are set waiting periods before you can qualify for another home loan. That could be as long as four years for a conventional mortgage or as short as two years for a VA loan (with FHA and USDA loans in the middle at three years). If you opt for a non-qualified loan (which considers financial factors besides income and credit), the waiting period depends on the lender. 

That said, these waiting periods can vary, depending on your circumstances. If you didn’t miss any payments before your short sale, or your short sale was due to financial hardship beyond your control, a lender might work with you before the standard time is up. 

Rebuilding your credit

Even if you didn’t miss any payments on your old mortgage, the short sale still dings your credit. So part of getting ready to buy again is rebuilding your credit so you can qualify for a good home loan. 

Some steps that could help include:

• Paying down other debts: This gives you more money to put toward homeownership expenses. 

• Paying all your bills on time: Payment history is the biggest factor in your credit score.

• Not opening new accounts often: Applying for credit results in a hard credit inquiry, which can cost you a few points. 

Freedom Debt Relief is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

Saving money to become a homeowner

Buying a house is likely to be the most expensive undertaking of your life. So before you take the plunge again, be sure you’re on solid financial footing. Save money for a down payment, closing costs, and to give yourself a cash cushion in your savings account. 

There’s no landlord—if something breaks, you have to fix it or get it fixed. Buying a house without an emergency fund was a big part of why I struggled the first time. And if you’re buying after a short sale, showing a lender proof of stronger finances and money in the bank should work in your favor. 

Be Cautious About Buying After a Short Sale

When you’ve been through a major financial hardship that leads to a life-changing event like a short sale, it’s good to take your time getting ready to buy again. Focus on making positive changes to your finances, saving money, and ensuring that being a homeowner is something that works for you.