Homeowners who lost their homes to foreclosure are making their reappearance into the housing industry. Since 2007, when the housing crisis began, more than five million homeowners lost their homes and were unable to qualify for a mortgage. After seven years, the foreclosure is no longer on their credit report, and they are emerging as qualified homebuyers. This could create a new category of buyers and an uptick in home sales.
Nearly one million homeowners underwent foreclosure in the twelve-month span covering October 2007 and October 2008. Twenty-five percent of them have already had the foreclosure removed from their credit reports. More than 600,000 foreclosures will be removed from credit reports this year. We can expect to see many of them reentering the housing market.
Yet, foreclosed homeowners may face obstacles. While foreclosed homeowners are seeing the light at the end of the tunnel, some big banks have not lightened the lending standards they tightened during the housing crisis. Many major banks faced high penalties for their mortgage lending practices, and as a result, placed stringent credit requirements on mortgage applicants. By requiring very high credit scores and nearly perfect credit, previously foreclosed homeowners may not qualify for a mortgage with these big banks.
While some big banks, like JP Morgan Chase and Bank of America, have restricted FHA loans and made it difficult for foreclosed homeowners to reenter the housing market, smaller banks and lenders have taken advantage of the opportunity to provide mortgages to foreclosed homeowners, making traditional and FHA loans available to them. FHA loans are appealing to previously foreclosed homeowners because they allow this segment to qualify for a mortgage in much less time than traditional mortgages. If buyers qualify, they could purchase a home in as little as one year to three years after a foreclosure. According to Moody's Analytics, it has been more than three years for more than one million foreclosed homeowners. In addition, under specific circumstances, both Freddie Mac and Fannie Mae only require two years before they will back mortgages to homeowners who had short sales.
Additionally, there is a new type of agency alternative loans available called non-QM loans, which give this underserved market the ability to purchase a home again, many times without the waiting period on housing events as long as you can prove you have the ability to repay. This includes proper income documentation, depending on the amount of time that has gone by since the housing event occurred, most programs require approximately 20% down payment, and assets to cover reserves. As more time passes from the date of the "housing event" the restrictions are reduced and borrowers may be able to qualify for conventional mortgage programs.
Banks are showing an increasing willingness to lighten mortgage lending restrictions to tap into the emerging market created by formerly foreclosed homeowners. Some banks have seen an increase in mortgages by previously foreclosed homeowners, and the number will grow as more people become aware that they are eligible. RealtyTrac estimates that approximately 7.3 million of these formerly foreclosed homeowners will again seek homeownership in the next eight years.
Jon Maddux, Co-Founder of afterforeclosure.com, explains:"There is a staggering number of people in America who don't realize that they are actually eligible to buy a home again after foreclosure or short sale. I often hear a nervous excitement when I tell someone that they are pre-approved for their new home loan because they thought they wouldn't be able to buy for 7 years. We have loan programs with NO waiting period! When we created our pass / fail test on AfterForeclosure.com we wanted to make it easy for people to take a quick test to see if there is a program available for them. All it takes is about one minute to see if they have a shot at homeownership!"
As time passes, we can expect to see an upswing in home purchases and mortgage approvals for foreclosed homeowners. As more banks gain confidence and loosen their lending requirements and homeowners have less fear about reentering the market, this segment of potential homebuyers can make a significant impact on the housing industry.