It’s easy to be discouraged about your prospects of buying a home, particularly if you’ve already experienced an event like bankruptcy or a short sale.
To that first point, we’ve already used this blog to address that declaring bankruptcy is actually one way to hit “refresh” on your finances, and get a clean start. Buying a home after bankruptcy may require some waiting, certainly, but it does not have to be the end of the road.
Is the same true in the event of a short sale?
What Is a Short Sale?
First, the basics. In real estate, a short sale refers to a real estate transaction where the seller is selling their property for less than the balance of the outstanding mortgage on it. As a result, the net proceeds from the sale will be less than the amount of debt secured by liens against the property.
A short sale can occur for any number of valid reasons. In some cases, homeowners may be behind on their mortgage payments, and are looking to get out from that situation before it gets worse (e.g., before they face the possibility of foreclosure).
In other instances, homeowners may be looking to initiate a short sale even if they’re current on payments, possibly because the value of their property has dropped significantly from the time when they purchased it.
In any event, for a short sale to happen, the seller’s lender must agree to accept less than a full payoff on the mortgage loan. In some cases, this can actually be a win-win for the current homeowner and their lender. For the homeowner, it may mean avoiding the negative credit ramifications that could occur with defaulting on payments and facing foreclosure (and, maybe, bankruptcy). For lenders, this provides a way to recoup some of their costs without having to repossess the home in foreclosure, which can be expensive and time-intensive.
How Does a Short Sale Affect Your Ability to Buy a Home?
For sellers, one of the biggest advantages of a short sale is that it typically has less of a detrimental effect on a person’s credit rating than the alternatives – such as foreclosure or bankruptcy.
While it may not be ideal for any party, a short sale is still a sale, and suggests to lenders and rating agencies that the homeowner was proactive about their situation, rather than allowing themselves to go into foreclosure.
With all this being said, will people who have used a short sale need to face a waiting period before they can purchase another home?
The long and short answer? “It depends.”
In many cases, the waiting period caused by a short sale will be dependent on which type of loan the would-be homebuyer is seeking.
For a conventional loan (that is, one offered by a typical bank or mortgage company, and backed by Fannie Mae), wait times may be around four years. For a government-backed mortgage, the wait time may be shorter; for instance, FHA loans typically have waiting periods of just three years following a short sale.
What’s more, the waiting period that a buyer might face could be far shorter (or even non-existent), depending on circumstances around their short sale. There are extenuating circumstances that could make it easier to secure a government-backed loan. For example, buyers can generally secure an FHA loan immediately after a short sale, with no waiting period, if they can document that they were not in default on their mortgage and had a record of making timely payments.
Similarly, buyers seeking a conforming loan can sometimes take steps to expedite the process. For instance, buyers able to put 20 percent down may be eligible to purchase in as few as two years after a short sale. And, for conforming and government loans, if a buyer can demonstrate that their short sale was the result of qualifying, extenuating circumstances (such as catastrophic illness or injury, divorce, death of a wage earner, an so on), their waiting period may be shortened, as well.
Looking to Talk With the Chicagoland Experts?
Ultimately, the conditions around a short sale, bankruptcy proceedings, or the transaction for a piece of property will change from person to person, or situation to situation. While there are laws and guidelines in place, of course, you may be surprised by just how much each individual’s unique circumstances can come into play.
Looking to get a handle on your unique situation? Curious about all of your options when it comes to bankruptcy or real estate law? Don’t hesitate to reach out to the Gunderson Law Firm to keep the conversation going.