Short Sale Before USDA? Amber Almost Lost Her Shot Counting the Wrong Clock
Amber almost lost her shot at a USDA loan before she ever filled out an application, because she was counting the wrong clock. If you have had a short sale or deed-in-lieu and you are thinking about USDA, her story could save you months of waiting in the wrong direction.
Amber's story
Amber is a fictional homeowner near Statesboro, GA. She is an illustration of a situation that comes up often, not a real client. She sold her last home in a short sale and assumed it was a lighter mark than foreclosure. In her mind, the clock was simple: count from the sale date, and when enough time passed, she would be fine.
That assumption is where the trouble started. Under USDA rules, a short sale is not treated lightly at all.
What the USDA guideline says
Paragraph 4.14.B.3 of the USDA guideline covers this. It says that deeds-in-lieu of foreclosure, short sales, and mortgage charge-offs are significant mortgage delinquency events treated the same as foreclosure.
From there, there are two possible clocks. The applicant is not eligible for 36 months if the event was due to failure to meet obligations. If it was due to extenuating circumstances, the applicant is eligible after 12 months with proper documentation.
Then comes the sentence that catches people off guard. The guideline states: "Selling a home through a short sale merely because the property value decreased significantly is not an extenuating circumstance."
So a drop in value, on its own, does not move you to the shorter clock. The reason behind the short sale decides which clock you are on, and the reason has to be supported with proper documentation.
The second gate: release of liability
There is another requirement that has nothing to do with months. The guideline says the Loan Originator must confirm the applicant has been completely released from the previous mortgage liability.
That matters because a short sale can close without every part of the old obligation being cleanly resolved. The way to confirm it is on paper. Request the written release of liability from the prior mortgage servicer, and ask your loan originator what documentation they need to see.
What Amber did differently
Amber stopped counting from the sale date alone. She asked which reason applied to her situation, and she started gathering the paperwork on the release of liability before she applied, instead of finding out about it halfway through.
The question to ask today
If you are in Amber's position, bring this exact question to your loan originator:
"Under USDA Paragraph 4.14.B.3, was my short sale due to documented extenuating circumstances, or only because the property value dropped? And what documentation do you need to confirm I was completely released from the previous mortgage liability?"
Then request the written release of liability from your prior mortgage servicer. Having that answer early tells you whether you are looking at the shorter clock, the longer clock, or whether there is a gap to close first.
A quick checklist
Before you apply for a USDA loan after a short sale or deed-in-lieu, work through these points:
- Write down the real reason the short sale happened.
- Gather documentation that supports that reason, if extenuating circumstances apply.
- Request the written release of liability from your prior mortgage servicer.
- Ask your loan originator which clock applies to you before you spend months waiting.
Keep in mind that this waiting period is only one part of USDA eligibility. Other requirements still apply, so the best move is to get a clear read on where you stand before you apply.
Let me help you find the path
I am Jason Sharon, a licensed mortgage broker with Home Loans Inc, and I am licensed in Georgia along with several other states. If you have had a short sale or deed-in-lieu and want to know whether USDA is realistic for you, call me at 843-LOW-RATE. I will walk through your situation and help you see which clock applies. I find the path.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
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