What is my Life going to be like After the Short Sale?

Posted by Owen McGab Enaohwo on Jul 10, 2010 | View Comments

Although a short sale is a much better option than a foreclosure—one which won’t leave you foreclosed out of your property with a foreclosure on your record—it is, granted, not a happy time. It can be quite stressful. One of the biggest stresses for the person going through it is wondering what life will be like after the short sale. Just how will it affect your future? There are two primary considerations that I’ll examine:  how the short sale will affect your credit, and how soon after a short sale you can again buy a home.

The Short Sale and Your Future Credit

One of the benefits of doing the short sale is that you will not have a foreclosure on your credit report.  It’s important that you remember that a short sale will be much less damaging to your credit than a foreclosure or a deed-in-lieu would be. With a foreclosure or a deed-in-lieu, your credit score would likely drop about 250 points or more. Compare this to the drop of 75 to 100 points that your FICO score will probably drop following a short sale.

The above information is not absolute and might not be the case for everyone. In some cases, a person takes as much as a 160 point hit on their FICO score following a short sale. And in some cases, the person who goes through foreclosure might have their credit score be decreased by an amount less than 250 points.  These are the exception rather than the rule, however.  The typical person suffers more of a hit following foreclosure than he does after a short sale.

The Short Sale and Your Future Ability to Buy a Home

This brings us to the question of how soon, following a short sale, will you once again be able to buy a house? Here again, the person who did the short sale is in better standing than the person who underwent foreclosure. Let me explain why.

Because of the recent economic crisis, which was primarily related to housing loans, Fannie Mae has made some changes.  Fannie Mae, in case you don’t know, is the entity which holds the most power in the United States’ conventional mortgage market. Put simply, they buy mortgage loans on the secondary mortgage market. Because the properties wind up going back to Fannie Mae if the borrower defaults, they have a substantial interest in establishing guidelines to keep a foreclosure from taking place.

Under Fannie Mae’s new guidelines, even if you went through foreclosure, your waiting period for getting a new mortgage can be cut down significantly if you provide documentation of extenuating circumstances that led to the foreclosure. These extenuating circumstances are basically the same types of circumstances that a person puts in his “hardship letter” to qualify for a short sale. They include things such as death, major illness, accident that resulted in severe injury, job transfer, and other things that were beyond your control which significantly affected your ability to stay up-to-date with your house payments.

Without proof of extenuating circumstances, the person who goes through foreclosure can expect a waiting period of about five to seven years before he qualifies for a new loan. With proof of extenuating circumstances, this wait can be cut down significantly:  three to seven years.

However, even this best-case scenario is not as good as the situation with the person who has done a short sale.  For him, the waiting period is just two years to be able to buy another home. Furthermore, if a seller doesn’t have a sixty-day late-pay, then the seller can immediately purchase a new home. This should be considered a strong incentive to remain current on your house payments even when your home sits on the market as a short sale; a situation known as a “Strategic Short Sale”.

So, no, the short sale is never exactly a happy event. No more than nearly drowning, but being saved, is especially happy. It is, however, something that gives you a much brighter future than many of the other would be alternatives such as a foreclosure, deed-in-lieu and so on.

Questions for you:

• I’d like your views on something: Given the economic collapse of 2008, what part do you think Fannie Mae played in it? Are their lending practices better or worse now than they were previously?

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