Happy anniversary, foreclosure! Now get lost.
It’s been seven years since foreclosure filings peaked amid the worst of the Great Recession. During the second quarter of 2009, the black mark of foreclosure was added to the credit reports of approximately 566,000 homeowners, according to figures published by the Federal Reserve Bank of New York.
The passage of time is now scrubbing those marks from credit reports, opening up the possibility of homeownership for millions of former homeowners.
Foreclosures, short sales and bankruptcies will fall off the credit files of 2.5 million consumers between June 2016 and June 2017, the credit bureau Experian says in a report released Oct. 27.
The black marks are starting to vanish, since any “significant derogatory event” – in industry terms – will roll off a credit report after seven years.
“In the coming years, boomerang borrowers will be a critical segment of the real-estate market,” says Michele Raneri, vice president of analytics at Experian. “While many of these borrowers have gone through a very difficult time, it is encouraging to see them taking control of their finances with better credit scores and all-around better credit management.” About 2 in 3 of these consumers have restored their credit scores to near-prime or higher status. About 12 percent of those who were foreclosed on have opened new mortgages, Experian said.
Boomerang buyers are particularly active in Los Angeles, Phoenix and Sacramento,
Their return is welcome news for the housing industry, because despite tight inventory in many hot markets, the rate of homeownership in the U.S. remains near its lowest level in over 50 years, according to the U.S. Census Bureau.
Just 63.5 percent of households owned their homes in the fall of 2016. That’s up slightly from the all-time low set in the spring of 2016, when homeownership fell to 62.9 percent. Compared that to a high of 69.2 percent in the second and fourth quarters of 2004. For 18- to 35-year-olds, the homeownership rate falls to 34 percent., which is exacerbated by the vast numbers of younger consumers who remain financially strapped after the Great Recession due to overwhelming student debt loads.
Waiting period reduced for those with foreclosures
Many experts believe these figures are about to rebound for consumers of all ages, between disappearing foreclosures and historically low interest rates, and as more of these “boomerang buyers” re-enter the market.
And just because it takes seven years for a foreclosure to disappear from your credit report doesn’t mean you have to wait that long to buy a house again. On the contrary, many people jump back into the housing market as soon as they can. And some lenders and government housing authorities are eager to help.
Some people blame the system and there is probably some truth to that, but there were also some very irresponsible borrowers who made some bad financial decisions.
|\u2014 Jeff Tufford|
Mortgage lender, Epic Mortgage Group
Previously, Fannie Mae and Freddie Mac – government-sponsored enterprises that purchase mortgages from banks and credit unions – stipulated that borrowers had to wait four years after a foreclosure before they could qualify for a conventional mortgage; in 2014, that term was lowered to two years. Similarly, the Federal Housing Administration’s “Back To Work” program, which helps people purchase a home with a foreclosure or bankruptcy in their past, lowered its waiting period from four to three years, and in some cases will reduce it to one year if certain qualifications are met.
Keep in mind that if you apply for a mortgage while a foreclosure appears on your credit report, you’ll not only pay higher interest rates, but you’ll also shell out more for mortgage insurance. Mortage insurance is a loan insurance policy that protects the lender if the borrower defaults on the loan and is most often required when a borrower’s down payment is less than 20 percent of the home’s value. While mortgage lenders use a wide range of criteria to evaluate whether to grant a home loan, the general rule is this: the lower the credit score, the higher the interest rate.
Although smaller banks, alternative lenders and credit unions tend to be more flexible about mortgage underwriting terms – with or without a foreclosure – this is not a hard-and-fast rule.
“A lot of small companies are still cautious and have limited their offerings to make sure they are in the black when it comes to mortgages,” says Jeff Tufford, branch manager and mortgage lender at Epic Mortgage Group in Grand Blanc, Michigan.
In addition, the current mortgage and refinancing market for customers with good credit – which is any FICO score above 700 – is pretty robust these days. Interest rates still at historic lows while refinancing is on fire. According to the Mortgage Bankers Association, in late July 2016, the number of refinance applications were up 55 percent from a year earlier. “Although we’ve seen more lenders introduce new programs for people with \u2018hurt credit,’ I wouldn’t say it’s picked up,” says Erin Lantz, vice president of mortgages at Zillow. “These mortgages require more complicated underwriting, so they take a lower priority.”
Of course, not everyone who experienced a foreclosure wants to buy a home again. After all, losing your home is a traumatic event and not something that anyone would choose to relive. “Some people blame the system and there is probably some truth to that, but there were also some very irresponsible borrowers who made some bad financial decisions,” says Tufford, who notes that many of the post-foreclosure clients he works with today have learned from their mistakes. “They’re being very cautious and don’t want to get in over their heads again.”
Teisha Powell, a foreclosure attorney and realtor in Boca Raton, Florida, has witnessed this firsthand with her own clients. “Even if the bank approves them for a monthly payment of $1,900, they want a house where the payment will be $1,200,” she says. “They don’t want to be overextended because they’re afraid of losing a home a second time.”
And then there are others who have taken a creative approach to owning a home post-foreclosure. In 2008, Hari Berzins and her husband Karl were living in central Florida, running their own restaurant and enjoying their 1,500-square-foot home. But as the housing crisis began to spread and the economy deteriorated, people were eating out less. Revenue sharply decreased, and when a tropical storm blew through the region, business fell off a cliff.
The Berzins closed their restaurant, which left them with no income and a pile of bills and debt they were unable to pay. They decided that the only way out was foreclosure and bankruptcy. “We had quite a mixed bag of emotions,” says Hari, who notes that the one thing drilled into her during childhood was to build – and keep – good credit. So when they filed for bankruptcy and lost their house to foreclosure, Hari felt extremely guilty. On the other hand, they were free. Once the dust settled, they vowed to become homeowners again, but this time they’d do it without a mortgage.
Back then, the tiny-house movement was just getting a foothold, so the Berzins did some research and soon decided to build one of their own without borrowing a penny. They moved into a small rental unit and both started working two jobs. They saved up $25,000 to buy a three-acre parcel in Floyd, Virginia, and soon had enough to build a 320-square-foot house. The house cost about $12,000 to build, and they paid cash for a well and septic system. Today they are debt- and mortgage-free and Hari offers advice at TinyHouseFamily.com.
While a tiny house – and no mortgage – is not for everyone, there are valuable lessons from their experience. “Keep your chin up and decide what your goal is,” says Berzins. “Do a little something every day toward that goal, whether it’s buying a couple of boards or putting $10 into a savings account.”
And if you do decide to buy another house with a foreclosure on your record, it’s essential to restore – and maintain – good credit, whether or not you decide to wait the full seven years for it to disappear off your credit reports. “It’s really important to protect all other areas of your credit by paying your bills on time, keeping balances low and checking for errors,” says Lantz.
Since the peak of the housing crisis, the number of foreclosures has dropped steadily. In 2015, there were just under 1.1 million in 2015 compared with almost 2.9 million foreclosures during 2010, according to RealtyTrac’s year-end foreclosure market report for 2015. But housing experts remain cautious, and some fear a return to the Wild West days when it seemed like even a poodle could qualify for a mortgage.
“I’ve been seeing some very scary products coming back to the market lately,” says Tufford, who notes that the majority of homebuyers he works with are pursuing more traditional mortgage programs. “In practice, getting a standard mortgage today isn’t much different than it was 10 years ago. But it is a big deal and should be decided upon carefully,” he says.