Q I sold my home in a short sale in 2010. I plan to buy another home next year. How will my short sale affect my home purchase?
A As you get ready for your new home purchase, one of your best resources will be a good mortgage banker. They are familiar with the realities of the mortgage market and can provide insight into your situation that is beyond the scope of this column. With that in mind, here are some things to consider as you apply for a mortgage.
If you are applying for a conventional loan (i.e., a loan less than $575,000 in Monterey County), Fannie Mae and Freddie Mac require that you wait at least four years after a short sale before funding a new mortgage. In special circumstances, the waiting period could be as short as two years. Since your short sale was almost seven years ago, the waiting period will not be a problem.
You will also need to meet a minimum FICO score. FICO scores range from 300 to 850. A score above 800 indicates excellent credit; a score below 580 represents poor credit. The exact score you need depends on a number of factors, including the type of loan you want and the amount of down payment you have. A score of 640 should be adequate for most mortgage applications. However, if you have a short sale on your credit report, your FICO score can easily drop below that level.
There are several ways to check your FICO score. A number of credit card companies have started making FICO scores available as a service to their customers. (I got mine from American Express just the other day.) FICO has several versions of its credit score. Most mortgage lenders use FICO Base 4 or 5, while most credit card companies use FICO Base 8. The scores calculated by each version may be slightly different, but they are close enough to see if you are in the ballpark. If you want more precise information, work with your mortgage banker to get the FICO they will use to underwrite your loan.
FICO calculates your score from information on your credit report. Your credit activity is tracked on a continual basis by the three major credit bureaus — TransUnion, Experian, and Equifax. Federal law provides that negative account information (like a foreclosure or short sale) can stay on your credit report for up to seven years. Since your short sale happened almost seven years ago, it will soon disappear from your credit report. Once it is off your credit report, your short sale will no longer factor into your FICO score.
You have a right to a free copy of your credit report from each of the three major credit reporting companies every 12 months. The easiest way to get yours is to go to www.annualcreditreport.com and click on the “Request yours now” link at the top of the page. After answering a few identifying questions, you will receive an electronic copy of your report that you can print or download and save. I suggest you take a close look at your reports to see what potential lenders are going to see.
The credit report won’t actually say “short sale.” Instead it will say something like “settled” meaning the lender opted to receive less than the full amount as settlement for the obligation.
Steven C. Merrell is an investment adviser and partner at Monterey Private Wealth, Inc., in Monterey. Send questions concerning investing, taxes, retirement or estate planning to Steve Merrell, 2340 Garden Road Suite 202, Monterey 93940 or firstname.lastname@example.org.
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