Foreclosure puts new home dreams on ice

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Dear Real Estate Adviser,
One of my coffee mates posed this question at work and the geniuses there who usually expound their encyclopedic knowledge couldn’t answer it. (Hah! At last, we stumped them!) The question: If you’ve lost a property through foreclosure, how long before you can buy another property?
— J. Koczan

Dear J.,
First of all, props for stumping the panel. At the very least, those resident geniuses are going to owe you lunch. And if you happen to look down your nose at them when dishing out the answer to this very timely question, we’ll consider it a case of justifiable condescension.

As you no doubt know, there are tens of thousands of recently foreclosed (former) homeowners who are wrestling with this very issue. Most homeowners who suffer a foreclosure must spend a “seasoning” period of five to seven years before they can qualify again for a Fannie Mae-backed mortgage.

Fannie Mae is influential here because, in effect, it will end up with the property if a borrower defaults on a conventional loan. Hence, Fannie is allowed to set most of the guidelines.

There are several exceptions, however. That five-to-seven year guideline applies to mortgage holders who did not suffer some extenuating circumstance that precipitated their default, such as illness, accident, job loss, job transfer or death of a spouse. (And sorry, a default due to increased payments from one of those insidious adjustable-rate mortgages is not considered such a circumstance.)

If there was a legitimate extenuating cause, a borrower may only have to wait as little as three years (but up to seven) before qualifying again. Much of that yearly variance depends on individual circumstances, by the way.

Owners who opted to let go of their homes via a short sale or deed in lieu of foreclosure can try to qualify for loans in much shorter periods; as little as two years hence on the short sale and three on that “deed-in-lieu-of.”

The lighter penalty is one reason those two housing exit routes are preferable for distressed owners who are otherwise considering turning in the keys. Another is that these methods have a far softer impact on your credit rating than an out and out foreclosure.

Of course, a foreclosure can’t keep a buyer from seeking out lenders who might offer a nonconforming mortgage right away. But such lenders will probably demand a hefty down payment of 20 percent or more and sky-high mortgage rates, assuming they approve the loan at all.

A foreclosure also can’t keep a rental tenant from striking a lease-option deal with a seller to buy the house they’re occupying. Typically, this involves a two- to five-year period of paying an extra rental premium that accumulates into a down payment.

Those are the main options. So tell those baffled eggheads at work that the answer is “7, 5, 3, 2 and zero years.” Then, let them chew on that over lunch!

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