A Lending Update: Re-Entering the Market After Foreclosure, Re-Building Good Credit and Guideline Changes

by Stephanie Sims and Natalie Terchek

How Long Do Foreclosed Buyers Have To Wait To Buy Again?

Now that the market is heating up, many homebuyers who have a short sale or foreclosure in their past are looking to buy again. There is a myth out there, says Kelly Price, loan originator with Wintrust Mortgage, that buyers who have had either of these real estate “blemishes” need to wait at least three to four years, and sometimes up to seven years, before they can qualify for a loan again, but this is actually not the case.

In fact, one of the most interesting programs the Federal Housing Administration (FHA) recently launched, Price says, is one for people who have had a short sale or foreclosure. If they can prove that a severe economic event, such as the loss of a job or a significant reduction in household income, ultimately caused them to lose their home, the FHA will help them get a new home within a year. In the past, the FHA required a consumer to wait three years from the date the claim was paid, so this new program is a huge opportunity for individuals to re-stabilize sooner.

“This program started Aug. 15 and will be valid through Sept. 2016,” Price says. “By economic event, the FHA specifically means these people who had short sales or foreclosures became unemployed or their household income was greatly reduced; if income was reduced, they need to prove they were earning at least 20 percent less for at least six months.”

With both Freddie Mac and Fannie Mae, buyers have to wait longer to apply for a loan again after experiencing a short sale. Both Fannie and Freddie typically require four years starting from the completion of their short sale to apply for a loan again. Fannie has an exception where these buyers can reapply in two years, but the buyer will need to pay a higher down payment in that instance – a minimum of 20 percent. After four years, Fannie will still require that borrowers put down 10 percent, and they will need a good credit score, as well.

“Even if a buyer with bad credit has saved money and is ready to buy, if they don’t have credit above 600 to get mortgage insurance, they will have an issue getting financing,” Price says. “It’s crucial for individuals wanting to be homeowners again to consult with a lender about how they can repair and re-establish their credit immediately, and most importantly, when they will be ready again. The time period will be different for everyone depending on their unique financial situation.”

And what about bankruptcy? First, know the difference – Chapter 7 cleans the slate and discharges debt from a buyer’s record, and assets – including homes – must be turned over; Chapter 13 sets up a repayment plan with creditors and stops any legal action a creditor may take against a debtor, including home foreclosure. The FHA can actually help Chapter 13 homebuyers; if you show that your buyer has paid down debts satisfactorily after a year of consecutive on-time payments, he or she could still be repaying the debt and be eligible for new financing with court permission.

To be of the best service, Price says, make sure you work with a loan officer who understands the financing eligibility dates in which a consumer is eligible to apply for financing. A credit report should identify the eligibility date, which is why it’s important for a loan officer to thoroughly review credit upfront for any previous bankruptcies.

Realtors have complained that loan officers are issuing pre-approval letters, only to find out that once a borrower is under contract, the buyer then learns that they have to wait to actually apply for financing until the wait period, or eligibility date, arrives. This should not happen if the loan officer has done a thorough job upfront. Often times, a lender cannot approve financing for closing until 30-60 days after the eligibility date due to required automated underwriting feedback that may be delayed in recognizing the eligibility date. Both Fannie and Freddie are working on updates that will improve the automated underwriting system feedback.

FHA “Saturating the Market”

While the FHA programs are beneficial to buyers with a bit of a blemished past, the FHA is changing from qualifying buyers with low credit scores and high debt ratios to stricter guidelines; the organization does not want to be saturating the market, and lenders will be reviewing credit more closely to determine if the loan applicant experienced a hardship, or if debt was mismanaged and disregarded.

“Today, if you check to see buildings that are FHA-approved, there are few and far between, ” Price says. “My company is seeing a trend of condo associations applying to get their condo buildings FHA-approved again, or for the first time. Wintrust has the authority to approve a condo project by Direct Endorsement Lender Review and Approval Process (DELRAP), if it meets certain eligibility requirements. A successful DELRAP process issues an FHA-approval to a building, which the project is then registered to HUD’s approved condominium website. This enhances the salability of a building, especially for those condo buildings with first-time homebuyer price points.”

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  • Mike Moyer says:

    Kelly Price is a hard working, quality LO. Had the pleasure of working w her at 5/3.

  • Jose Garza says:

    Great to see good quality LO’s and friend’s on this panel! Congratulations to all !!!! A special shout out to Kelly, James, Brian, and Mary who’ve I had the pleasure of working with throughout my career.

  • Neil Coleman says:

    Excellent job. Good information well written.

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