Mortgages and home ownership are significant issues for my debt clients that are facing foreclosure, bankruptcy or considering a short sale for their home.  When one of these events happen, there are general rules of thumb of what will happen if you seek a mortgage and when you might be able to qualify for a mortgage.

Foreclosure results in the longest waiting period before you can qualify for a mortgage.  For this reason, when things appear dire, a short sale or bankruptcy should be a strong consideration before you allow your house to simply go to foreclosure.  On average, it will be 7 years before you can qualify for a Fannie Mae or Freddie Mac mortgage after completion of the foreclosure.  FHA and USDA Rural will require at least 3 years from the date of completion of the foreclosure and VA will require 2 years.  No matter how you look at it, this is a long time and by avoiding a foreclosure with a bankruptcy, as you will see, you can cut this time in half.

With a Short Sale, the time before you can qualify for a mortgage sale is 2-4 years depending on the loan to value ratio of the short sale agreement and depending on the conditions of the sale.  The mortgage company will still look at the sale date (the day the short sale closes) when considering your qualification for a mortgage and the time period you have to wait.  This range is the same for Fannie Mae, FHA and USDA Rural and Freddie Mac is a straight 4 year time period.

Bankruptcy on the other hand, carries with hit the same 2-4 year time period of a short sale which is significantly less than what happens with a foreclosure.  Fannie Mae and Freddie Mac require waiting 4 years from the date of discharge, FHA and VA is 2 years from the discharge date and USDA Rural is 3 years from the discharge date.

Incidentally, with a Chapter 13 Bankruptcy, the time period may be reduced to one year with satisfactory plan payments and special permission from the Bankruptcy Court when considering a FHA, VA or USDA Rural mortgage.

When is becomes apparent that things are beginning to go downhill financially and that a foreclosure may be imminent, it is best to consider going ahead with a bankruptcy or short sale to shorten the time period you have to wait if home ownership is a renewed goal after you obtain financial freedom.  Allowing a foreclosure will all but guarantee that a mortgage and home ownership is years away and avoiding the foreclosure will go a long way in allowing you to return to home ownership sooner.

Thank you to Trevor Meeks of Prime Lending (tmeeks@primelending.com) for providing this invaluable information for clients that have fallen on hard times but still maintain the dream of home ownership!