With the worst of the foreclosure crisis seemingly behind us, we’re seeing a new trend in the housing market. This is the re-entry of people who previously lost a home to foreclosure. These so-called “Boomerang Buyers” are former homeowners, so they are knowledgeable as to what home ownership entails. For this reason, real estate agents love working with these buyers. However, they face serious hurdles in financing a home if they have a recent foreclosure on their record.
Clearing these hurdles is no easy feat. Banks have always been reticent to offer mortgages to borrowers who have had a foreclosure within the last seven years. Those who have gone through a foreclosure can expect to wait at least three years before a lender will consider them for a conventional or government-backed mortgage. For financial advice throughout the process, these buyers might consider talking to a financial advisor.
Foreclosure Is the New Normal
Foreclosures no longer carry the negative stigma that they once did. Banks used to view it as a sign of irresponsibility. Yet in the wake of the housing crisis of 2008/2009, more people recognize that even the most responsible of us can face foreclosure. Seeing a foreclosure on someone’s record does not simply mean that that person walked away from their home.
The recent recession not cost many people their jobs. It also left skilled workers in industries where their previous type of job no longer existed. Faced with the need to permanently downsize or relocate, many homeowners could no longer afford their homes. But with property values depreciating, they could not sell. Foreclosure or short sale was often the only option. Many of these people, reestablished in new careers, are hoping to be homeowners again.
Finding a Mortgage Lender
If you are looking to buy a home again after foreclosure, there are several ways you can prepare. Planning ahead will give you the best shot at obtaining mortgage financing.
Be aware that the three year waiting period starts from the date the foreclosure is completed. It is not when the bank gives notice or even the date you were forced to leave the home. There may be some private or portfolio lenders who will consider writing a mortgage prior to the three year mark. However, you can expect high rates and fees, and maybe an unstable mortgage investor. But so soon after a stressful foreclosure, you might want to wait until you can qualify for conventional mortgage financing.
Saving Back Up After Foreclosure
Then, you should expect to make at least a 10 percent down payment. Saving the money for a down payment is often one of the hardest steps for those looking to buy again after foreclosure. The circumstances that led to a foreclosure likely wiped out whatever savings you may have built up!
Lenders and mortgage insurers want to verify that you have the savings to help prevent a future financial problem. Saving for a down payment is one of the ways you can show that you are financially responsible. FHA loans do offer another option with a smaller down payment (3.5%).
Tidy Up Your Credit
Lastly, make sure to get your credit profile as clean as possible. The foreclosure will ding your credit score significantly. So hopefully nothing else happens to plummet your score even further. Check your credit report for any errors. Pay off any accounts listed as past due or in collection as soon as possible. This is another way you can show your future lender that you are a responsible borrower.
Finally, speak with a mortgage lender before you go to look at homes again. Once you reach three years since your foreclosure, apply for a mortgage pre-approval. The loan officer will be able to tell you if there are any extra steps you need to take.
If your real estate agent knows about your past foreclosure, they will want to know the steps you’ve taken since then. They will want to know you and your finances are in order to buy again. Having a pre-approval in hand shows them you are not wasting their time. It also puts you in a great position when you are ready to make an offer on a home.
You might also benefit from working with a financial advisor before and after the process to ensure you do have your finances in order and are ready to buy. A matching tool like SmartAsset’s can pair up with a financial professional who can meet your needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to up to three nearby advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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