One important trend developing in the national residential real estate market is boomerang or rebound buyers. These are former homeowners that went through a foreclosure or short sale during the Great Recession. With the economic future looking brighter, these people are again looking to become homeowners. In most cities, this makes good economic sense because homeownership is less expensive than renting and of course, owning a home is the largest asset that most American's have.
RealtyTrac estimates that 7.3 million boomerang buyers will return to the housing market over the next eight years. There are no set rules for boomerang buyers to again qualify for a mortgage but there are very real obstacles. The lowest hurdle is qualifying for a loan that a bank keeps in its own portfolio (doesn't resell to Fannie or Freddie). However, these loans usually come with some very ugly terms. For more favorable loans that qualify through the FHA, Fannie, or Freddie, the general waiting period to again qualify for a primary residence mortgage is seven years. However, if extenuating circumstances can be documented, the waiting period can be shortened to three years. Common extenuating circumstances include serious health issues or death of a primary income provider, job loss, or divorce that led to a foreclosure or short sale.
Unfortunately for many wanting to buy a home, their problems go beyond a foreclosure or short sale. They likely have other derogatories on their credit reports. If a person keeps all other payments current and doesn't have other negative events on his or he credit report, a foreclosure or short sale will fade in importance with time and completely fall off the report in seven years. It's important for "want to be homeowners" to keep clean credit reports in order to qualify for an extenuated circumstances three year waiting period.
High current debt can be another problem for borrowers. Even if they keep other bills paid, if they have borrowed too much money they will have trouble qualifying for a loan. And don't max out lines of credit. The most favorable view is taken of lines of credit where about 30% of the max has been borrowed. If you are close to the max, it's viewed as being financially at risk.
Another problem returning buyers can run into is government guaranteed loans that were paid off. Commonly, these are FHA or VA guaranteed loans. Any amounts repaid as government guaranteed loans must be repaid by the homeowner/borrower before he or she can again qualify for a government backed loan. These transactions are tracked in a government database known as CAIVRS, which isn't available to the public. To learn your status in this database you need to go through a lender.
Another frequent surprise to rebound buyers is the need for a down payment. In the hay-day of real estate purchasing, many buyers got in without a down payment. Those days are gone. The FHA requires a minimum down payment of 3.5% for conforming loans with mortgage insurance. Conforming loans without mortgage insurance require a 20% down payment.
Being preapproved for a loan is a must for buyers today. Neither real estate agents nor sellers want to spend time with potential buyers only to later learn they can't qualify for a loan. Many that bought a home when it was super easy to qualify assume they are ready to buy again today. In many cases that is not true because the rules have changed. Those wanting to buy a house need to consult with a real estate professional to learn what they need to do to again qualify.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.