In another sign of the housing market's transition back toward normalcy, an increasing number of Americans who previously lost their homes to foreclosure or short sale have become eligible to buy again.
As a recent Washington Post report detailed, so-called boomerang buyers are returning to the fold, often with the help of loans from the U.S. Federal Housing Administration. FHA loans come with less stringent standards for qualification and can eventually be refinanced into a more conventional mortgage. Depending on the nature of a previous foreclosure or short sale, many buyers can make themselves viable candidates for an FHA loan within just a few years of losing their old homes.
Securing a manageable new mortgage
Fixed-rate mortgages, which remain affordable on average in the current marketplace, are especially attractive to many boomerang buyers who don't want to dig themselves another hole and would like as much certainty as possible in their budget. And while circumstances vary from buyer to buyer depending on income, credit score and a range of other approval factors, this sort of purchase activity is only expected to accelerate over the next couple of years. According to the Post, data from John Burns Real Estate Consulting revealed an estimated 10 percent of all U.S. home purchases made this year were by buyers who lost a previous property to foreclosure or short sale between 2007 and 2013. In the Washington, D.C., metro area, such buyers have accounted for 17.5 percent of all new home sales and as more former owners become eligible in 2015 and 2016, those figures are expected to rise.
Borrower eligibility is dependent on a variety of factors, including whether the issued loan is conventional or government-insured. Regardless, prospective buyers whose credit scores dipped in the wake of a job loss or other recession-induced ills face better odds than those who never demonstrated sound financial habits in the first place. While loans from the U.S. Department of Veterans Affairs generally offer the most affordable and lenient terms, including no required down payment, there's a burgeoning FHA loan market for those who have recovered from past struggles and can come up with a 20 percent down payment.
"FHA loans are easier to get after a short sale," Steve Cohen, a Maryland-based mortgage banker, told the Post. "In fact, some borrowers don't have to wait at all if they never had any late payments on their mortgage. Borrowers who were in default on their loan have to wait three years to qualify for an FHA loan. However, all of these waiting periods can be shortened with extenuating circumstances, such as a job loss, a divorce, a serious illness or the death of the person who was the primary wage earner."
Understanding the circumstances
Much of the success borrowers are finding with FHA loans can be traced back to the Back to Work program, which was established in 2013 to aid families and individuals who lost their homes during the recession and/or the housing crisis. Applicants must undergo housing counseling, but can potentially make themselves eligible to reapply for a home loan within 12 months of a foreclosure or bankruptcy filing, provided they display satisfactory financial practices in the meantime and can prove their previous income was cut by 20 percent or more because of a job loss or pay cut.
Otherwise, the same quantifiable requirements apply to boomerang buyers seeking FHA loans. Minimum credit scores usually range from 620 to 640, while debt-to-income ratios cannot exceed 43 percent. There's often more leniency associated with down payment terms, but the boomerang buyers who have successfully rebounded are typically those who have saved, rehabbed their credit and demonstrated that their previous issues were more likely the result of circumstance and misfortune rather than a red flag.