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More Mortgages Or Less?

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Posted On: 09/30/2015

Question: Several years ago we lost our home to foreclosure. We were told that it would be at least seven years before we could apply for a mortgage. Is that information still correct?

Answer: Since the end of the Great Depression there were very few foreclosures in the U.S., one reason we have generally enjoyed low mortgage rates. However, with the introduction of toxic loans and the financial fall-out they caused, we began to see a massive increase in the number of foreclosures seen across the country in 2006, 2007 and 2008.

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The old idea was the mortgage lenders really didn’t want to deal with someone who had a foreclosure in their financial history until the borrower had re-established credit. Part of this approach was also cautionary – if you were a mortgage lender then you surely did not want to give a mortgage to someone who had reneged on a home loan, the product you sell. If they had one mortgage failure then maybe they would have another.

As the financial dust began to clear from the mortgage debacle it became clear that some portion of the more than seven million people who lost their homes were not scoundrels seeking to abuse lenders. Instead, they were people who too often lost jobs and income. And despite good prior credit, they could not make their payments. As a result, lenders and insurers began to change their approach, and the result is that we now have “boomerang” borrowers, people with foreclosures, short sales (pre-foreclosures), bankruptcies and deeds-in-lieu of foreclosure on their financial history who can re-enter the mortgage marketplace.

For instance, the FHA has a “back-to-work“ program which allows once-troubled borrowers to get financing with 3.5 percent down in as little as a year after an adverse “economic event.” Fannie Mae will consider loans with at least 10 percent down at two years after a “significant derogatory event.”

Don’t be fooled into thinking that we have entered a new era of mortgage niceness. Lenders will want to know what happened and why, in an effort to assure that no borrower who deliberately defaulted on their loan – a so-called “strategic default” – can easily or quickly get a new mortgage. Also, lenders will want to be absolutely sure that credit and income have been re-established and will stay re-established to the extent that anyone can predict the future.

Still, the opening is there for boomerang borrowers to get back into the marketplace so speak with lenders for details and specifics. Be prepared to provide a lot of paperwork documenting past credit issues and proving current credit worthiness.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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