How to Rebound from a Short Sale

How to Rebound from a Short SaleShort sales allow homeowners who are "under water" (owe more on their mortgage than their home is worth) to sell their home.  This is the case when a lender agrees to accept less than what is owed on the property, helping the borrower ultimately avoid foreclosure (one of many options).

But how does a borrower come back from this type of transaction?  Doesn't a short sale brand you as a "high-risk" borrower for the future?

There are some ways, according to the New York Times, that homeowners in this situation can bounce back.  Here are some suggestions.

Keep Great Documentation

When you're looking to buy your next home, Fannie Mae automatically requires a waiting period of at least 4 years when for sellers who can only put down 10 percent down (2 years for 20 percent) - essentially, a penalty.  

According to Myron Headen, senior vice president in the residential mortgage division of Bryn Mawr Trust in Pennsylvania, Fannie does in fact allow the 4 year period to be cut in half for borrowers who can document "extenuating circumstances" - meaning one-time events beyond the control of the borrower, such as: job loss, medical bills, a financial hit from divorce.  Be prepared to show that you had no reasonable option other than to default.

Additionally, the Federal Housing Administration (FHA) has a "Back to Work" program that extends borrowing privileges to applicants that would otherwise be ineligible who are able to prove that their financial problems were the result of a one-time event, AND that they were able to re-establish satisfactory credit for the last year.

Pay Attention To Your Credit While Waiting

While you're forced to wait to obtain another mortgage, pay exceptionally close attention to your credit.  It may feel liberating to be lifted from a heavy mortgage, and instead allow yourself to run up your credit cards or take out a loan for a big purchase.  Unfortunately, these actions can put you even farther down in the hole, continuing to add harm to your credit score.

Tom Showalter, chief analytics officer at Digital Risk, recommends frugal management of revolving credit, ensuring outstanding balances do not exceed 30 percent of the borrower's credit limit.

Finally, remain current on all credit obligations at all times.

Keep Records of Income Sources While Waiting

New regulations are in store that require lenders to prove their borrowers' ability to pay their mortgage.  The more documentation you have stored up, therefore, the better off your lender will be able to back you.  Don't hide obligations - such as child support or alimony - from your lender, as this could compromise this process.

Think Smaller, More Affordable Places

When you are able to apply for another mortgage, it is best to look for places that are smaller and more affordable.  You will be able to put more money down on these places, putting you in much better standing.

Are you recovering from a short sals situation and could use some guidance?  Don't hesitate to send us an email or give us a call, and we'll be happy to help.

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