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Reader question: “My husband and I had to sell our house through a short sale about three years ago, due to equity losses incurred during the housing crash. We are hoping to buy another home in the near future, before rates go any higher. Can we get another mortgage after a short sale? What are the current rules for this in 2013?”

The short answer is yes, you can qualify for another mortgage after selling your previous home via short sale. How long it takes to restore your credit is another question entirely — and harder to answer.

It’s a coincidence you should ask about this right now. The Department of Housing and Urban Development (HUD) recently updated their rules for getting an FHA loan after a short sale. I’ve covered that below, as well as the general rules for conventional or “regular” mortgages. Here’s what you need to know.

Short Sales Commonplace During the Housing Crisis

Having a short sale on your credit report does not necessarily “doom” you, as far as lenders are concerned. Short sales were common during the housing bust, and they weren’t always a sign of negligence on the homeowner’s part. In many cases, responsible homeowners who never missed a single mortgage payment lost a tremendous amount of home equity. So they had no other choice when selling their homes but to go the short-sale route.

Mortgage lenders know this. They know that many of the people with short sales on their “record” are otherwise well-qualified borrowers. So they typically do whatever they can to qualify them for financing. With that being said, it won’t happen overnight. You might have to wait one to three years after a short sale, before you can get another mortgage to buy a house.

It Partly Depends on What Has Happened Since the Short Sale

A short sale can harm your credit score. The amount of damage it does will depend on (A) how it gets reported by the lender, and (B) whether or not you had late payments leading up to the short sale. It could lower your FICO credit score by 50 points or more, according to experts.

The best thing you can do is show that it was an isolated event. If your credit report shows a pattern of responsible activity before and after the short sale, the lender will be more inclined to view it as an isolated event caused by extenuating circumstances (like equity loss). On the other hand, if you have delinquencies and defaults on your report, you’ll have a much harder time getting another mortgage after the short sale. You may have to wait additional years and make a larger down payment to get approved.

Getting a Conventional Mortgage After a Short Sale: General ‘Rules’ for 2013

When applying for a conventional or “regular” mortgage loan after a short sale, the general rule is at least two years with the restoration of good credit patterns. Note that it’s a general rule, and not an industry standard. Different lenders have different standards when it comes to this sort of thing.

According to Stephanie Lane, an attorney who specializes in foreclosures:

“It depends in large part on how much money you are able to put down … you’ll have to make a 20% down payment to wait two years, 10% down payment to wait four years, or the minimum down payment if you wait seven years.”

According to a May 2013 article in U.S. News: “The wait time may be closer to two or three years after a short sale. In rare cases, a homeowner who sold in a short sale may be able to get a new loan right away if he or she hasn’t fallen behind on mortgage payments.”

Getting an FHA Loan After a Short Sale: Rule Change for 2013

Prior to this article, the rules for FHA loans required borrowers to wait at least three years after a short sale. But that rule was changed with the publication of HUD Mortgagee Letter 2013-26 on August 15, 2013. The letter provides “minimum underwriting standards and criteria for evaluating [FHA] borrowers who have experienced an Economic Event…”

An “economic event” in this context is something beyond the person’s control that caused a loss of income and/or employment, resulting in a short sale or foreclosure.

Here’s the gist of Mortgagee Letter 2013-26:

  • Borrowers may qualify for an FHA loan after a short sale if they can show it was the result of an Economic Event, as defined above.
  • The borrower must complete HUD-approved housing counseling. The counseling session must be at least one hour in length and can be conducted online, in person, over the phone, or via Skype.
  • Counseling must be completed at least 30 days, but not more than six months, before the borrower applies for an FHA loan.
  • The lender must determine that the borrower had satisfactory credit before the Economic Event, and for at least 12 months after the event.
  • The borrower must meet all other HUD/FHA guidelines for loan approval.

If you meet these and all other requirements outlined in HUD Mortgagee Letter 2013-26, you could buy a house with an FHA loan as soon as one year (12 months) after a short sale.

Disclaimer: This articles covers the general rules for buying a house and getting a mortgage after a short sale. There are exceptions to many of the rules mentioned above. This article is provided for educational purposes only and does not take the place of housing counseling. Only a mortgage lender can tell you if you are qualified for a home loan under their guidelines.