HOW DO BANKRUPTCIES, FORECLOSURES AND SHORT SALES AFFECT QUALIFYING FOR A MORTGAGE?
By Brad Hudson | October 1, 2020

Financial hardships can happen to anyone. Some hardships are greater than others and can force someone into bankruptcy or to foreclose or short sale their home. However, there is some good news. Most mortgage loans will allow you qualify after a certain amount of time has passed since the derogatory event.
Bankruptcy:
The main two types of bankruptcies that are filed are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy a debtor would eliminate all their debts but also sell all their non-exempt assets to help pay for the debts. In a Chapter 13 bankruptcy a debtor agrees to a plan that will allow creditors to be paid off in 3-5 years. Below are the current guides if you are affected by either of these:
FHA- Chapter 7 must be discharged for two years
Chapter 13 may be considered after one year of payments into the
Chapter 13
VA- Chapter 7 must be discharged for two years
Chapter 13 may be considered after one year of payments into the
Chapter 13
Conventional- Chapter 7 must be discharged for four years
Chapter 13 must be discharged for two years or four years from
dismissal
Foreclosure:
Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments, but it can also happen when the borrower fails to meet other terms in the mortgage document.
FHA- Foreclosure must be three years old
VA- Foreclosure must be two years old
Conventional- Foreclosure must be seven years old
For VA loans it is also important to note that if the government suffers any loss as a result of the delinquency, the amount of entitlement that was used for the VA loan cannot be restored until the loss is paid back.
Short Sale:
A short sale in real estate is when a financially distressed homeowner sells their property for less than the amount due on the mortgage. The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender. The lender either forgives the difference or gets a deficiency judgment against the borrower requiring them to pay the lender all or part of the difference between the sale price and the original value of the mortgage. In some states, this difference must legally be forgiven in a short sale.
FHA- Short sale must be three years old
VA- The VA doesn’t set a required waiting period, or seasoning period, for
VA loan short sales, lenders typically do.
Conventional- Homebuyers with a 20% down payment may qualify in as few as two
years following a short sale. Buyers with 10% down would need to
wait four years and buyers with less than 10% down will need to
wait seven years from the date of the short sale.
With a VA loan, you will also lose your entitlement put to use on that loan. The only way to get it back is to repay the claim in full to the VA.