Former Owners Get New Shot at Foreclosed Homes
Some former homeowners who lost their property to foreclosure can now buy their old homes back, simply by paying the current market price.
A new directive from the Federal Housing Finance Agency, effective immediately, allows Fannie Mae and Freddie Mac to sell foreclosed homes in their inventory to any qualified purchaser - including the former owner - at fair market value.
That's a significant change from the old policy, where anyone who wanted to buy back their foreclosed home from either of the two enterprises had to repay the full balance owed on their old mortgage. Because many of these homes fell sharply in value after they were bought and their prices still have not fully recovered, that represents potential savings for their former owners.
"This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods," said FHFA Director Melvin Watt. "It expands the number of potential buyers of REO properties and is consistent with the Enterprises' practice of requiring fair-market value for those properties."
REO is an abbreviation for "real-estate owned," the industry term for foreclosed homes.
Qualifying may still be a problem
It's far from clear how many former homeowners might be able to take advantage of the new policy, however. Fannie Mae and Freddie Mac currently have a combined total of 121,000 homes in their foreclosure inventory, according to the FHFA.
Having gone through foreclosure makes it very difficult to qualify for a new mortgage - the blot stays on a person's credit report for seven years, though the impact does lessen over that time. Fannie Mae and Freddie Mac's own guidelines will approve a borrower for a new mortgage in as little as three years after foreclosure, though other standards will also apply.
The new guidelines do allow a third party to buy a property on behalf of the previous owner, which may be one way around the credit scoring problem. In that event, a spouse with a separate credit history or other family members might obtain a mortgage and purchase the home for the previous owner, and perhaps make arrangements to transfer ownership and financing once the owner's credit has recovered.
In any event, such a purchase is only allowed if the home is to be used as the buyer or previous owner's primary residence - that is, it cannot be used by a previous owner to reacquire a vacation property or obtain their former home to be used as a rental.
Fannie, Freddie foreclosure sales
Both Fannie Mae and Freddie Mac hold substantial inventories of properties that have reverted to them through foreclosure, which they make available for purchase through special programs. It's not clear if the special terms available through these programs will be available to former owners, however.
Freddie Mac's HomeSteps program offers special terms and financing for persons seeking to buy these homes as owner-occupants, including down payments of as little as 5 percent with no mortgage insurance and a waiver of the property appraisal requirement. Unfortunately, these options are only available in a limited number of states.
Fannie Mae recently ended most of its special financing options for homes bought through it's HomePath program for listing foreclosed properties though it still offers some flexibility on financing options, including allowing greater seller contributions than are permitted in a conventional transaction. Some HomePath properties may also be eligible for special financing through HUD's Neighborhood Stabilization Program.