People who lost their home to foreclosure during the Great Recession are becoming eligible for mortgages again, mainly for the simple reason that they waited seven years until the black mark came off their credit report.
But what can other boomerang buyers - those who lost a home to foreclosure and are ready to buy again - do if they want to get a home loan before seven years after a foreclosure? There are some options, though they include paying a premium in interest and a down payment.
Even with a foreclosure on your credit report for seven years, its impact on your FICO score - the most widely used credit scoring system - will lessen over time during those first seven years, according to the Fair Isaac Corp, developer of the FICO system. If all of your other credit obligations are kept in good standing, your FICO score can rebound in as little as two years.
A growing market
More than 5 million American families lost their homes to foreclosure between 2007 and 2014, according to the Wall Street Journal.
Of the 910,000 whose credit reports showed they had foreclosure proceedings between October 2007 and October 2008, 264,400 had no evidence of a foreclosure on their credit reports by October 2014, according to Fair Isaac Corp., which developed FICO scores. That number will rise by up to 645,600 by the end of 2015, according to FICO.
That leaves about 4 million families who lost their homes to foreclosure who may still have it listed on their credit reports. That's a lot of people who potentially may want to buy a home within seven years of foreclosure.
To be approved for a home loan within seven years of a foreclosure, here are some loan options and things to do:
Improve your credit score
FICO credit scores range from 300 to 850 and most mortgage lenders require at least a 620 to 660 score. The better the score, the more favorable the loan terms that are usually offered.
FICO scores have increased for people with foreclosures coming off. The Journal reports that 12 percent of the people, or about 109,000 who had foreclosure proceedings on their credit reports between October 2007 and October 2008 had a FICO credit score of at least 680 by October 2014. That's up from 6.2 percent in October 2012 and 4.4 percent in October 2010. Keeping current with other loans since foreclosing likely improved their credit scores.
"Foreclosure in general has a huge impact on credit, right off the bat," automatically dropping a credit score 200 points, says Jeremy Schachter, branch manager at Pinnacle Capital Mortgage in Phoenix, Ariz.
The three major credit reporting firms start the seven-year clock from the date the lender reports the borrower missing a payment that eventually leads to foreclosure.
"Foreclosure is a pretty significant, damning thing on your credit report," Schachter says.
Prove extenuating circumstances
Lenders that offer conventional mortgages may still offer you a loan within seven years of a foreclosure if you can show that extenuating circumstances led to you losing your home, Schachter says. These can be hard to prove, and may need to be dire, he says.
For example, if your wife died and she was the family breadwinner, and you lost your home, that could be an extenuating circumstance. Or you could have been laid off.
"It's hard because underwriters don't want to sign their name off on this loan because it's going to be subjective," Schachter says.
The Federal Housing Administration, or FHA, has a three-year wait for foreclosures. There are a few drawbacks that go beyond overlays that banks may impose with stricter lending criteria because they don't think the minimum standards set by the Department of Housing and Urban Development and other government agencies are high enough. The funding fee of 1.75 percent of the loan amount is rolled into the FHA loan, which goes to the FHA, Schachter says.
The FHA also has a loan limit that's based on the average home sale price in the area. Maricopa County in Arizona, for example, has a $271,050 FHA limit, he says.
FHA mortgage insurance premiums dropped in January to .85 percent for 30-year fixed loans up to $417,000. The sticking point, however, is that FHA loans require mortgage insurance for the life of the loan. That may be OK for someone three years after a foreclosure, but as it gets closer to seven years, they may want to refinance into a conventional loan, says Jeff Onofrio, branch manager of AnnieMac Home Mortgage in Mount Laurel, N.J.
"I would look at it as a short-term fix" to build equity, Onofrio says of an FHA loan before a foreclosure comes off a credit report.
An FHA loan requires a 3.5 percent down payment - with or without a foreclosure on your record - versus as low as 3 percent for a conventional loan.
FHA extenuating circumstances
A combination of the two above options is the FHA Back to Work - Extenuating Circumstances mortgage loan program that offers a loan one year after foreclosure.
To qualify, applicants must show that they had at least a 20 percent reduction in income that lead to the foreclosure, says Michelle Black, a credit expert at HOPE4USA.com, a credit education and restoration program in Charlotte, N.C.
Tax returns showing that income has since bounced back to its previous state or higher must be submitted. And, credit reports and scores must meet the lender's minimum qualifications and borrowers must have re-established a responsible credit history with on-time rental housing payments for a year. HUD-approved housing counseling must also be completed.
Veterans can get a loan guaranteed by the Veterans Administration two years after a foreclosure. However, if they had a foreclosure on a VA loan to begin with, they may not be eligible for another one, Schachter says.
Groups of investors offer niche loans that are 3-4 percent higher than normal rates, and can be obtained a year after a foreclosure with a 25 percent down payment, Schachter says. These can often be found through mortgage brokers.
Some are offered as quickly as a day after foreclosure. Whitney Fite, president of Angel Oak Home Loans in Atlanta, says his company offers what it calls a Home$ense" program to people with bad credit a day after they've had a foreclosure settled.
It offers a 30-year fixed mortgage at 6.49 to 8.99 percent with a minimum 20 percent down payment.
Such a loan can make sense for someone who wants to buy a home soon and plans to refinance later when they can get better terms, Fite says.
The average home loan through the program is $250,000, he says. The average loan to value is 77 percent, with a 23 percent average down payment of $50,000 to $60,000. The average customer has a 670 credit score.
It has another program, called Portfolio Select, that offers a 5.5 percent interest rate with 20 percent down two years after a foreclosure.
"A lot of times it's a one-time credit event," Fite says of a foreclosure.
"Bad things happen to good people, and this is an underserved area of the market that we're trying to serve," he says.
Alternative mortgage startup Privlo specializes in lending to borrowers with complicated finances, such as self-employed workers, small business owners and credit rebuilders with recent foreclosures. Someone with a foreclosure a year ago who has a credit score of at least 550 and has an otherwise clean credit history can get a loan, says Privlo founder Michael Slavin.
Its interest rates typically fall between 5.25 and 9.25 percent, with a minimum 20 percent down payment.
"A recent foreclosure doesn't mean that you can't get a mortgage," Slavin says. "There are alternative lenders like Privlo who work with credit rebuilders and understand that there are people who deserve a second chance at homeownership."
Paying bills on time and not maxing out credit cards is important to the lender, he says, helping to give the impression that a borrower isn't living beyond their means.