Getting a Mortgage after a Short Sale

If you are struggling to make your mortgage payments — or you’ve missed making some payments — you may be thinking about negotiating a short sale of your home with your lender. After all, a short sale may not hurt your credit rating as much as a foreclosure. What’s more, while borrowers who go through a foreclosure may have to wait seven years before they’re eligible for a new mortgage, short sellers may qualify in two years.

But according to recent news reports, some mortgage loan underwriting systems are unable to distinguish short sales from foreclosures on consumer reports. And that may keep or delay you from getting a new mortgage.

The Federal Trade Commission (FTC), the nation’s consumer protection agency, has some tips to help short sellers avoid a potentially costly mistake: being kept out of the housing market because of difficulties interpreting short sale and foreclosure information on consumer reports.

The Difference Between a Short Sale and a Foreclosure

A short sale occurs when you sell your home for less than the balance you owe on the mortgage loan, and the lender agrees to accept the proceeds of the sale instead of pursuing foreclosure. Your lender works with you and your real estate agent to set the sale price and review the offers, and then works with the buyer’s real estate agent and mortgage lender to finalize the sale.

A foreclosure takes place when you don’t make the mortgage payments and the lender takes legal action to repossess your home.

Take Action

If you negotiated a short sale of your home:

  • Get a letter from your lender confirming that your loan closed in a short sale, not a foreclosure. Send a copy of the letter to each of the nationwide credit reporting companies: Equifax, Experian, and TransUnion. You also can use the letter if questions arise when you try to buy another home.
  • Order a copy of your credit report. Make sure the information is accurate. The nationwide consumer reporting companies are required to provide you with a free copy of your credit report, at your request, once every 12 months. Visit AnnualCreditReport.com or call toll-free: 1-877-322-8228. If you find a mistake, contact the credit reporting company and business providing the information to correct the error.
  • When you’re ready to buy another home, get pre-approved. A pre-approval letter from a lender shows that you are able to go through with a purchase. Pre-approval is not a final loan commitment; it means you met with a loan officer, your credit report was reviewed, and the lender believes you can qualify for a specific loan amount. This pre-approval process allows your lender to identify issues and errors in your credit report that may keep you from qualifying for a loan. That, in turn, allows you to correct inaccuracies before they can prevent you from buying another home.