Buying a house after a foreclosure used to seem like a nearly impossible task, but now boomerang buyers are taking back their share of the housing market. Moody Analytics estimates that as many as 1.4 million formerly foreclosed households will be eligible for new FHA loans in 2014. This means that they have completed the necessary three-year hiatus following foreclosure, and can begin the process of securing a mortgage once again. However, buying a home after a foreclosure can present special challenges and pitfalls that previous homeowners may not expect. If you're one of the new groundswell of boomerang buyers, here are a few ways that buying a house after a foreclosure can differ from your first go-round.
1. You may owe the government money.
You probably won't receive a bill for this debt, but if your first mortgage was backed by the federal government, you could still be liable for the settlement amount. That means you won't be able to get another federally-backed loan until your debt is settled. According to Bankrate, this information "isn't publicly accessible, so borrowers must consult an authorized lender to find out whether their foreclosed loan is listed."
2. Your foreclosure isn't as much of a black mark as you might think.
Yes, it will still show up on your credit report for seven years, but the stain decreases significantly after just a few years of steady credit and bill payments. This is especially true if the foreclosure is the only major ding on your credit report. Dan Klinger, president of K. Hovnanian American Mortgage explains, "The industry is saying, 'Pay your dues and then get back into the market.'" And that's partly because...
3. Boomerang buyers are big business.
This is both good and bad news. The good news is that lenders are increasingly accustomed to working with people who are buying a house after a foreclosure. They know how many former foreclosure households are out there, and they know that many of them are back on their feet and ready for credit again. However, they also know that many boomerang buyers are overeager to get back into home ownership again, and some banks may take advantage of this with higher fees and interest rates. Depending on your credit history, some degree of risk mitigation might be reasonable on the lender's side. But it can easily go too far and create yet another bad situation for returning buyers. Some must pay as much as $300 per month for mortgage insurance alone, according to the Wall Street Journal.
Federal loans can pose some of the strictest obstacles. CNN Money reports, "Mortgage giants Fannie Mae and Freddie Mac, for example, require defaulters to wait five years -- and have a minimum credit score of 680 and put 10% down -- before they can purchase a home again. If they don't meet that criteria, the wait is seven years, at which point the foreclosure is expunged from a person's credit report."
4. Your qualifications will have to be stronger than before.
When you're a first-time home buyer, getting a mortgage pre-approval is a smart move. When you're buying a house after a foreclosure, it's pretty much required. Sellers and real estate agents want to know that you're ready to get back in the game, and the best way to prove that is with a lender pre-approval. You'll also need a bigger down payment. Many of the deals made in the 1990s and early 2000s required zero money down, but nowadays, even the most qualified buyers have to have cash in hand. This is even more important to boomerang buyers, who have a little more need to prove themselves to lenders and sellers than other buyers in the market for a home.
5. You're older and wiser, and that's a good thing.
Families that endure a short sale or foreclosure know how important it is to buy less than you can afford-- a principle many first-time home buyers have to learn the hard way. The Wall Street Journal interviewed two boomerang buyers, both of whom recently bought homes again, at a price nearly half as much as their former payments, even with mortgage insurance tacked on. These buyers tend to know better than to fall for variable rates and shady lending practices. That makes them much less likely to put themselves into a home they'll have to give up down the road.
If you're one of the millions ready to jump back into home ownership, don't be afraid to reach out for help. Bankrate advises that the sooner you talk to a lender about the process of bouncing back, the better. You may already qualify for a second chance, or you may have some credit repair to take care of before you get started.
Once you've found yourself a great home to buy, make sure to insure it with the most affordable homeowners insurance you can find. An independent agent can do the comparison shopping for you, and find you the right coverage at the best price possible. Trusted Choice insurance agents are located in your ZIP code, to help you out with all your homeowners insurance shopping, and even with your claims, if the need arises. Enjoy your new home!