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Mortgage After Foreclosure or Short Sale

Borrowers who have experienced a foreclosure, short sale, or deed-in-lieu of foreclosure must observe mandatory waiting periods before qualifying for a new mortgage. Waiting periods range from two to seven years depending on the loan program and the nature of the event, with reduced timelines available when documented extenuating circumstances contributed to the default.

Key Takeaways

  • Conventional loans require a seven-year waiting period after foreclosure, which may be reduced to three years with documented extenuating circumstances
  • FHA requires a three-year waiting period after foreclosure; VA requires two years
  • Short sale waiting periods are generally shorter than foreclosure: four years for conventional, three years for FHA, two years for VA
  • Deed-in-lieu of foreclosure is typically treated the same as a foreclosure for waiting period purposes
  • Extenuating circumstances include job loss, medical emergency, and death of a wage earner — not overextension or strategic default
  • Borrowers must re-establish credit with clean payment histories after the adverse event, not merely wait out the clock
  • Deficiency balances from short sales may need to be resolved before a new mortgage application can proceed

How It Works

Determining the Start Date of the Waiting Period

The waiting period clock begins on the date the borrower’s ownership interest in the property was formally terminated. For a foreclosure, this is typically the date the foreclosure sale was completed and the property title transferred, as reflected in public records. For a short sale, it is the date the sale closed and the lien was released. For a deed-in-lieu, it is the date the deed was recorded transferring ownership to the lender. Borrowers should not confuse the start date with the date of the first missed payment, the date a notice of default was filed, or the date the borrower vacated the property. The credit report completion date and the public records date should align; if they do not, the lender will use the later of the two dates or request documentation to reconcile the discrepancy.

How Loan Programs Evaluate the Prior Event

When a borrower applies for a new mortgage after a foreclosure or short sale, the underwriter reviews the credit report, public records, and the borrower’s letter of explanation. The underwriter must confirm the nature of the event (foreclosure, short sale, or deed-in-lieu), the completion date, whether extenuating circumstances existed, and whether the borrower has re-established satisfactory credit since the event. For conventional loans processed through Desktop Underwriter (DU) or Loan Product Advisor (LPA), the automated system will flag the prior event and apply the applicable waiting period. Manual underwriting requires the underwriter to independently verify all dates and documentation.

Extenuating Circumstances Documentation

To qualify for a reduced waiting period under conventional guidelines, the borrower must submit a written explanation describing the circumstances that led to the default, accompanied by third-party documentation. Acceptable documentation includes employer termination or layoff letters with dates, medical bills and insurance explanation-of-benefits statements showing the financial impact, death certificates and evidence of the deceased person’s income contribution, divorce decrees and settlement agreements showing the division of financial obligations, and court orders or legal filings relevant to the financial hardship. The underwriter evaluates whether the circumstances were genuinely beyond the borrower’s control, whether the borrower acted responsibly during and after the hardship, and whether the borrower has demonstrated the ability to manage credit obligations since the event.

VA Entitlement Restoration

VA-eligible borrowers who used a VA loan on the foreclosed property face an additional consideration: restoration of VA entitlement. When a VA loan goes to foreclosure and the VA pays a guaranty claim, the borrower’s entitlement is reduced by the amount of the claim. Borrowers may apply for a one-time restoration of entitlement, but this requires that the VA’s loss has been repaid in full. If the loss has not been repaid, the borrower may still have remaining partial entitlement available for a subsequent VA loan, subject to reduced loan limits. The two-year waiting period applies regardless of whether full entitlement has been restored.

Impact on Future Loan Terms

Even after the waiting period has elapsed and the borrower has re-established credit, a prior foreclosure or short sale may affect the terms available on a new mortgage. The borrower’s credit score at the time of application will reflect the long-term impact of the adverse event, which can remain on the credit report for up to seven years from the date of the first missed payment. Lower credit scores result in higher interest rates through loan-level price adjustments (LLPAs) on conventional loans. Borrowers who qualify through extenuating circumstances reductions may also face higher down payment requirements than borrowers without a prior adverse event. FHA and VA loans, which have more flexible credit requirements, may offer more favorable pricing for borrowers recovering from foreclosure or short sale.

Related topics include minimum credit score requirements by loan type, late payments and mortgage qualification, collections, judgments, and liens on mortgage applications, bankruptcy and mortgage waiting periods, and credit repair strategies before applying for a mortgage.

Key Factors

Factors relevant to Mortgage After Foreclosure or Short Sale
Factor Description Typical Range
Loan Program Each loan program (conventional, FHA, VA, USDA) imposes its own waiting period schedule after foreclosure, short sale, or deed-in-lieu 2-7 years depending on program and event type
Type of Adverse Event Foreclosure, short sale, and deed-in-lieu may carry different waiting periods within the same loan program Short sale periods generally shorter than foreclosure for conventional loans
Extenuating Circumstances Documented hardship beyond the borrower's control may reduce the applicable waiting period for conventional loans Reduction from 7 years to 3 years for conventional foreclosure
Credit Re-Establishment Borrowers must demonstrate clean credit histories with active trade lines after the adverse event Minimum 12 months of on-time payments on at least 3 trade lines
Deficiency Balance Status Whether any remaining balance from the short sale or foreclosure has been satisfied, settled, or forgiven Must be resolved or documented before new application

Examples

Conventional Loan After Foreclosure with Extenuating Circumstances

Scenario: A borrower lost a home to foreclosure in January 2020 after being laid off from a 15-year career position due to company closure. The borrower has a termination letter, unemployment records, and documentation showing the job loss was involuntary. Since the foreclosure, the borrower has re-established credit with four active accounts, all showing 36 months of perfect payment history, and has a current credit score of 680. The borrower applies for a conventional loan in March 2023 with a 15% down payment.
Outcome: The borrower has met the three-year reduced waiting period for conventional loans with extenuating circumstances. The 15% down payment exceeds the typical 10% minimum required for the extenuating circumstances exception. With re-established credit and documented involuntary job loss, the application can proceed, though the borrower will face higher LLPAs due to the 680 credit score and prior foreclosure history.

FHA Loan After Short Sale

Scenario: A borrower completed a short sale in June 2021 following a divorce. The divorce decree shows the departing spouse's income was necessary to maintain the mortgage. The borrower now earns sufficient income independently and applies for an FHA loan in September 2024 with a 3.5% down payment and a credit score of 640.
Outcome: The borrower has exceeded the three-year FHA waiting period after a short sale. FHA's minimum credit score for the 3.5% down payment tier is 580, so the 640 score qualifies. The borrower must provide the divorce decree and evidence that the income loss was directly tied to the marital dissolution. Assuming clean credit since the short sale and stable employment, the application can proceed through FHA automated underwriting.

VA Loan After Foreclosure with Entitlement Loss

Scenario: A veteran had a VA loan foreclosed in March 2022 after a service-related medical discharge. The VA paid a guaranty claim of $45,000 on the loan. The veteran applies for a new VA loan in June 2024 with a credit score of 660. The veteran has not repaid the $45,000 guaranty loss.
Outcome: The veteran has met the two-year VA waiting period. However, because the $45,000 guaranty claim has not been repaid, full entitlement restoration is not available. The veteran must use remaining partial entitlement, which may limit the maximum loan amount without a down payment. If the remaining entitlement is insufficient for the desired purchase price, the veteran would need to make a down payment to cover the gap. The medical discharge may support an extenuating circumstances finding for underwriting purposes.

Common Mistakes to Avoid

  • Counting the waiting period from the first missed payment instead of the foreclosure completion date

    The waiting period begins when the property title formally transferred, not when the borrower first defaulted. A foreclosure process can take 6-18 months from the first missed payment to the sale date. Applying too early based on the wrong start date results in a denial that could have been avoided by waiting a few additional months.

  • Assuming all adverse housing events carry the same waiting period

    Short sales typically have shorter waiting periods than foreclosures under conventional guidelines (four years vs. seven years). Borrowers who completed a short sale may qualify for a new loan years before they would have qualified after a foreclosure. Incorrectly categorizing the event or assuming the worst-case timeline delays the borrower's re-entry into homeownership unnecessarily.

  • Claiming extenuating circumstances for financial overextension or market-driven strategic default

    Extenuating circumstances require a nonrecurring event beyond the borrower's control. Purchasing a home the borrower could not afford, experiencing a decline in property value, or choosing to stop payments because the home was underwater do not qualify. Submitting a weak extenuating circumstances claim wastes time and may result in a denial that could have been avoided by waiting for the standard period to elapse.

  • Failing to verify whether a deficiency balance remains outstanding after a short sale

    In many states, the original lender retains the right to pursue the borrower for the difference between the short sale price and the mortgage balance. An outstanding deficiency judgment is a liability that affects DTI and may need to be resolved before a new lender will approve the application. Borrowers should confirm whether a deficiency was waived, forgiven, or remains collectible.

Documents You May Need

  • Letter of explanation detailing the circumstances of the foreclosure, short sale, or deed-in-lieu
  • Supporting documentation for extenuating circumstances (termination letter, medical records, divorce decree, death certificate)
  • Credit report showing the adverse event date and current account statuses
  • Public records documentation confirming the date of title transfer or sale completion
  • Evidence of credit re-establishment (recent credit card and loan statements showing on-time payments)
  • VA Certificate of Eligibility showing current entitlement status (for VA loans)

Frequently Asked Questions

Does the waiting period start from the date I moved out of the property or the date the foreclosure was finalized?
The waiting period starts from the date the foreclosure sale was completed and the property title transferred out of your name, as reflected in public records and on your credit report. The date you physically vacated the property and the date of your first missed payment are not relevant to the waiting period calculation. If there is a discrepancy between the credit report date and the public records date, the lender will generally use the later of the two.
Can I get an FHA loan two years after a foreclosure if I have extenuating circumstances?
FHA's standard waiting period after foreclosure is three years, and FHA does not offer a formal reduced waiting period for extenuating circumstances related to foreclosure in the same way that conventional guidelines do . However, borrowers with documented extenuating circumstances and re-established credit may receive more favorable consideration during manual underwriting review. The three-year minimum waiting period generally still applies.
Does a short sale affect my ability to get a VA loan?
Yes, a short sale triggers a two-year waiting period before you can obtain a new VA loan . If the short sale involved a VA loan and the VA paid a guaranty claim, your entitlement may be reduced. You can apply for a one-time entitlement restoration if the VA's loss has been repaid in full. If not, you may still have partial entitlement available for a subsequent purchase.
Is a deed-in-lieu of foreclosure better than a foreclosure for future mortgage eligibility?
Under most agency guidelines, a deed-in-lieu of foreclosure carries the same waiting periods as a standard foreclosure. The potential advantage of a deed-in-lieu is that it may be less damaging to your credit score than a completed foreclosure proceeding, and it may resolve the situation faster than a prolonged foreclosure process. However, from a mortgage eligibility standpoint, the waiting period and documentation requirements are generally equivalent.
What if I had a foreclosure on an investment property, not my primary residence?
The same waiting periods apply regardless of whether the foreclosed property was a primary residence, second home, or investment property. The property type does not reduce or extend the mandatory wait. However, lenders may view a foreclosure on an investment property somewhat differently during manual underwriting, particularly if the borrower maintained all payments on their primary residence throughout the period of financial difficulty.
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