By Lindsey Hadwin
Of the millions of Americans who have lost their homes in the foreclosure crisis, many dream of buying a home again. As a result of more than 19.2-million vacant homes nationally, securing a mortgage in the future is possible in less time than ever before. Re-establishing creditworthiness can provide a key to that dream again.
“Credit is very tight for creditworthy buyers. Never mind for those who have a blemish such as a foreclosure on their record,” said Juan Bonilla, Director of Homeownership Education at Lawrence Community Works in Lawrence, Massachusetts.
Bonilla’s agency has launched a program to give families who have lost their homes as a result of foreclosure a second chance. “[The objective is] to help them build their credit and savings once again and provide them with a good educational and informational foundation on the responsibilities and process of homeownership,” said Bonilla. The goal is to help families become homeowners again, and do it “the right way.”
After losing a home to foreclosure, families should focus on securing suitable housing that is within their financial means. This will give those who have lost homes to foreclosure a chance to pay off debts and save as much money as possible towards a down payment. If families choose to move in with family members after a foreclosure, financial experts suggest keeping a record of timely rental payments to help re-establish their credit and make them more attractive to lenders. It is important to keep records of all payments, by either collecting receipts or keeping copies of the cashed rent checks.
In an effort to help foreclosed homeowners secure a new mortgage, Fannie Mae has shortened the waiting period from 4 years to 2 years for borrowers with a 20 percent down payment. Borrowers with a 10 percent down payment will still be required to wait 4 years, unless they can prove that the foreclosure was due to an extenuating circumstance such as death, divorce or job loss.
Borrowers who can offer documented proof of the circumstances that led to their home foreclosure may be approved for a mortgage in 2 years with only a 10 percent down payment.
While this may still seem like a long time, it gives those buying a home again a good opportunity to rebuild credit histories, secure good-paying jobs and establish sizeable savings prior to re-entering the world of homeownership. Those who have used their time wisely will have a good chance at getting another mortgage–particularly if they have a down payment equal to 20 percent of the home’s value they wish to purchase.
“Rebuilding credit is extremely important,” said Rasy An, Foreclosure Prevention Coordinator at Coalition for a Better Acre in Lowell, Massachusetts.
“I recommend that people go to a local bank, which are often more willing to work with borrowers who have experienced a financial difficulty.”
According to An, one of the easiest ways for borrowers to rebuild their credit is to open a Certificate of Deposit account with $500 to $1000, which can be used as collateral if the bank will agree to give them a credit line equal to the COD. By using a card attached to the account regularly and paying bills on time, borrowers can show they are financially responsible.
Another option for foreclosed homeowners is FHA loans. Although traditional lenders provide the loans, the federal government insures them, which makes mortgages easier to obtain for homebuyers with a history of foreclosure. They also require only a 3.5 percent down payment and have lower interest rates than traditional mortgages.
Regardless of circumstances, homebuyers must wait 3 years from the date of their foreclosure before applying for an FHA-insured mortgage. Proof of timely bill-paying since the foreclosure is crucial.
According to the Department of Housing and Urban Development, borrowers can use FHA loans to purchase or refinance single-family homes, multi-family homes with 2-4 units, condominiums and manufactured homes with a permanent foundation.