You asked and we answered! We reached out to one of experts, Katie Brinson, with McLean Mortgage and this is what she had to say:
Short sales have been more common during the last decade as people rebound from the 2008 Foreclosure Crisis, recover from the deaths of spouses, divorce and other financial setbacks. The ramifications include a substantial (but temporary) hit to credit score, the inability to obtain a new mortgage for several years, and potential tax consequences if the difference between what is owed and what is recovered is not written off by the lender. Before considering a short sale, homeowners should have an in-depth consultation with their CPA to discuss how the Mortgage Debt Relief Act may impact their tax returns.
From a lending perspective, the amount of the short sale does not matter as much as the length of time that has elapsed since title transfer. Each program has a different waiting period between the time a short sale concludes and when a borrower may purchase a home again (see attached Credit Events Chart for specifics). VA and FHA programs are the most lenient, allowing borrowers to repurchase after 2 and 3 years, respectively. The tax implications and the amount of the short sale have typically elapsed by the time a client is ready to repurchase, and current income and the last 12-24 months of obligation repayment history are primary factors in the underwriting process.
The Short Sale will stay on a borrower’s credit for seven years, much like a foreclosure. The impact to the credit score lessens as each month passes, with the hardest hit occurring the first 24 months after the title transfer has occurred.
The actions that borrowers should take after having a short sale to ensure they preserve their ability to purchase again are:
-Keeping up on any new housing payment obligations. A 12 month history of on-time housing payments will be required and verified before a new mortgage can be issued. If a borrower does not pay rent to a traditional landlord it is very important that they retain all records of on-time payments. This can be accomplished with cancelled checks, copies of money orders and receipts from the landlord. It is imperative that cash be avoided whenever possible, as it cannot be tracked, verified or used to establish a rental history.
–Keeping credit clean. Borrowers should ensure that they do not miss any more car, credit card or installment loan payments after a short sale whenever possible and should limit credit inquiries to items that are strictly necessary (such as utility inquiries or housing inquiries). Opening new revolving debt obligations, such as credit cards, is not advisable. Obtaining a vehicle loan is ok as long as the payment is reasonable and all payments are made on time.
–Ensuring continuity of employment. Employment stability is a key factor in showing that a borrower is ready for a new mortgage after a short sale. Changing industries repeatedly or switching between jobs without showing an improvement in salary are all red flags to an underwriter.
–A written letter of explanation. Underwriters are human and are compassionate and understanding individuals. A thorough, precise letter of explanation with supplementing documentation goes a long way towards helping an underwriter understand why a borrower is ready for a new mortgage, and helps to explain prior negative credit events. For example, if a short sale was necessary due to job loss and a job history has been re-established, this shows that a one-time event occurred and has been remedied.
For more information either give the Lee Gosselin Real Estate Team and/or myself a call to discuss your options.
Katie Brinson, MBA
Certified Mortgage Advisor
NMLS ID: #820647
McLean Mortgage Corporation
Mobile: (540) 212-8277
Office: (757) 955-2180
Fax: (571) 419-6756
2809 S. Lynnhaven Rd., Suite 100
Virginia Beach, VA 23452