First, what is a short sale? A short sale is when your lender agrees to accept less than your outstanding mortgage balance to satisfy the loan. A short sale is best for homeowners who are underwater and struggling to pay their mortgage. Although the process tends to be longer and is more complicated than selling a home, it is still quicker and cleaner than a foreclosure. Although you would expect a lender to want to recover the entire mortgage, it is less costly for the lender to pursue a short sale than a foreclosure or bankruptcy.
Although your credit will take less of a hit if you opt for a short sale over foreclosure or bankruptcy, the downside is there is a waiting period before you can qualify for another mortgage. The length of the period solely depends on which program you apply for.
Two of the various programs and their respective waiting periods are listed below. Note these are general guidelines and are continually changing in response to the current housing market.
Conventional mortgage: 2-4 years
In order to qualify for the mortgage in two years, homeowners must have 20% down payment. If the homeowners have 10% down payment, they will receive the mortgage in 4 years. If the homeowner has less than 10%, they will receive the mortgage in 7 years.
FHA mortgage: 3-4 years
Homeowners must meet the mandatory minimum FHA Guidelines, such as re-established credit, minimum credit score of 580 FICO to qualify for a 3.5% down payment. HUD allows borrowers with a credit score between 500 to 580 FICO to qualify for a 10% down payment.
If there were extenuating circumstances surrounding your short sale such as losing a job, critical illness or the death of a co-borrower, the waiting period for certain programs will be shortened. They may also be shortened depending how far in arrears you were at the time of the short sale; the less the time the shorter the waiting period.