Boomerang Buyers- How to Find Your Way Back to Homeownership

Going through a foreclosure can be a traumatic experience, but it doesn’t mean you’ll never own a home again. Getting a mortgage if you have a foreclosure on your record has its challenges but is not impossible to overcome- your dream of homeownership is not just a fantasy.  While your credit will take a big hit after foreclosure, you may be able to get another mortgage after some time passes. It is key to remember that, getting a loan isn't the same for each boomerang buyer; it depends on the circumstance of the individual's foreclosure or short sale and their credit history since the event.

More than five million American families lost their homes to foreclosure between 2007—the year when the crisis kicked up—through the end of last year. Foreclosures and most negative credit events stay on credit reports for up to seven years. For those who lost their homes in the early years of the crisis, credit scores are improving as the black marks drop away, improving their ability to borrow again.

It is certainly possible to obtain financing in today’s environment and still get competitive interest rates as long as the borrowers fulfill certain credit obligations. It’s important to note however a bankruptcy, foreclosure and a short sale aren’t the same event. A bankruptcy comes in two basic forms, a Chapter 7 and Chapter 13. A chapter 7 bankruptcy completely wipes out dischargeable debt while a chapter 13 is a repayment plan administered by a court-appointed trustee. A foreclosure occurs when a mortgage lender takes back its collateral – the house – after the borrowers fail to pay as agreed and the lender follows specific procedures, based upon where the property is located.  A short sale is an agreement between the lender and the homeowners to accept an amount to pay off the mortgage that is lower than what is owed.

An unfortunate borrower can experience all three events, but they’re not necessarily tied together and can happen independently. As it relates to getting a mortgage afterward, there are some guidelines lenders must follow as well as new options.

Conventional Rules

Conventional loans are those underwritten to guidelines set forth by Fannie Mae and Freddie Mac. Loans approved using Fannie Mae guidelines require there be at least a two-year waiting period since the discharge of a chapter 7 or the filing of the chapter 13. Freddie Mac is a bit more difficult to qualify for, as the waiting period for a bankruptcy is four years.

With a foreclosure on the books, there must be a seven year waiting period for Freddie as well as Fannie. A so-called “pre-foreclosure” when the lender begins the foreclosure filing process but the foreclosure was avoided, the waiting period is two years from the date of the event. In the event of a short sale, Fannie asks for a two year waiting period and Freddie four.

Down payment requirements ask for at least 20 percent down or four years if the down payment is 10 percent. It’s very important to note here that just because Fannie and Freddie issue guidelines for those with a bankruptcy, foreclosure or short sale, a lender has the authority to ignore these guidelines and stick to a longer waiting period.

Government Rules

VA, FHA and USDA loans are more lenient when borrowers have experienced a bankruptcy, foreclosure or short sale.  All three ask for a two year waiting period for a chapter 7 and one year from the date of a chapter 13 discharge. With a foreclosure, there needs to be at least three years for an FHA loan, two years for VA and three for a USDA mortgage. Short sale requirements ask for three years with an FHA loan, two for a short sale as long as there was no VA mortgage involved. USDA loans also ask for a three year waiting period for a short sale.

Extenuating Circumstances

There are exceptions to these guidelines for government and conventional loans for as little as a one year waiting period as long as the borrowers can document their credit defaults were due to circumstances beyond their control. These are difficult to qualify for but primarily relate to an extended unemployment due to a layoff, a nasty divorce or a death in the family. Still, lenders can add their own requirements.

Credit must also be reestablished, typically with at least three trade lines and lenders can require a minimum credit score as well. This can be a challenge as obtaining credit with a recent bankruptcy, foreclosure or short sale can be difficult, but it is possible.

The Importance of Repairing Credit

The best way to repair your credit is to continue using credit, but make sure you keep up to date with your payments. People often make the mistake of closing credit lines or cutting up credit cards when their scores take a major hit. But shunning credit altogether only leaves a large gap in your credit history, which is nearly as troubling to lenders as a bad credit history. Lenders want to see you using credit regularly, but they want you to do it in a responsible way. To avoid missing a due date by accident, set up automated payments. If you find yourself struggling to keep up, work with your lenders to set up a modified payment schedule. You’ll also want to get a full credit report to ensure that there aren’t any errors or instances of fraud, which can further harm your score.