real estate

Finding a mortgage loan after foreclosure

Steve McLindenQuestionDear Real Estate Adviser,
I lost my home two years ago to foreclosure following a layoff. Now that I'm working again, I'd very much like to own a home once more rather than rent. My credit history was perfect until the layoff and has been good ever since I started the new job. However, the interim was rough on my credit score. Can a person like me ever hope to own a home again?
-- T.

AnswerDear T.,
Absolutely, you can own a home again in the not-too-distant future. Even though a foreclosure lingers on your credit report for seven years, it's very unlikely you'll be shut out from a conventional mortgage loan for that long. Fannie Mae, America's largest mortgage buyer, has said the waiting period is a minimum of three years before you can get a mortgage loan again following a foreclosure due to extenuating circumstances. It's roughly the same time frame you'll find for Federal Housing Administration- and Freddie Mac-backed conventional mortgage loans. All three are considered conforming lenders.

Of course, you could always try your luck with nonconforming lenders who have the freedom to dictate their own terms. However, given your recent circumstances, you would likely have to produce a healthy down payment of at least 20 percent to 25 percent and endure a higher-than-market interest rate that could conceivably add tens of thousands of dollars to your mortgage loan obligation over its lifetime.

So you are only temporarily relegated to the sidelines, it appears. What can you do now in the interim? Well, you can pinch pennies and sock away money for a down payment for when you are ready to buy again. The larger your down payment, the greater likelihood you'll be approved and the friendlier your interest rate.

Other options are a lease-option deal or lease-purchase plan. That's where you pay a monthly sum exceeding the typical rent price for the right to buy at a later date. A lease-option typically gives you the option to buy at a certain point, while a lease-purchase contractually obliges you to buy. In both scenarios, the extra rent money accumulates to form a down payment. But before you sign this kind of deal, I suggest you run it by an attorney, if possible, because you have fewer protections than in an outright purchase.

Meanwhile, you can continue work on repairing your credit by paying bills on time, paying off other debts and disputing any old or questionable information contained on your credit report. Because a job loss precipitated your foreclosure, you will fare better in your credit restoration efforts than the tens of thousands of so-called strategic defaulters out there. Such defaulters typically walked away from upside down mortgage loans simply as a fiscal strategy -- not because of extenuating circumstances such as job loss or transfer, divorce, health crisis, etc. In fact, Mortgage Bankers Association Chief Economist Jay Brinkmann recently said that such defaulters could be waiting for up to eight years after default to obtain a conventional mortgage loan.

Given your improved financial situation and the fact that lenders are getting increasingly aggressive in competing for market share again, it's a pretty safe bet you will own a home again and probably sooner than you thought possible.

Good luck!

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