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Health & Fitness

HAVE YOU GONE THROUGH FORECLOSURE? A Financial Plan May Help You Qualify to Buy Another Home

Buying a home after foreclosure is difficult, but it isn't impossible. CCCS of MD & DE housing counseling staff offer step-by-step advice on how to successfully qualify for a mortgage if you lost your last home.

According to RealtyTrac, nearly 7 million Americans have had to leave their homes since 2007. Many were up-to-date on their mortgage payments before they lost their jobs and were forced into foreclosure or short sale. Those who applied to become homeowners once they were reemployed often were stuck with a 2-to-7 year waiting period. Recent changes in Department of Housing and Urban Development guidelines now make it possible for these consumers to obtain a mortgage sooner. However, housing counselor Matthew Gregory cautions this is not a guarantee. 

Gregory, who works for national nonprofit Consumer Credit Counseling Service of MD & DE (CCCS), explains, “If you lost your home due to job or income loss, you may find it easier to obtain home financing today than you would a couple of years ago, but it’s still a challenge. To qualify for a mortgage, you must be able to show you’ve recovered financially. It also helps to locate and work with a lender who provides the right loan product.”

Foreclosure and short sale both put a black mark on your credit history.  As a result, consumers who have undergone these circumstances often find it harder to become homeowners again. The amount of time they must wait to be approved for financing depends on the type of loan they plan to obtain.  Conventional mortgages often demand a 2.5-to-7 year wait after short sale and a 3-to-7 year wait after foreclosure.  Mortgages that are backed by the Federal Housing Administration (FHA) or Veteran’s Administration (VA) may require shorter wait times. 

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HUD’s recent Back to Work - Extenuating Circumstances guidelines make it possible for homebuyers to obtain an FHA-backed mortgage just 12 months after a foreclosure or short sale.  CCCS Director of Housing Tom Simonton says, “To qualify under these guidelines, you must meet certain criteria and be able to show your credit history doesn’t reflect your true ability or intent to repay a mortgage.”

The new FHA loan guidelines require borrowers to document that:

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  • Their foreclosure or short sale was due to an economic event beyond their control, such as job loss or loss of income, which led to a reduction in household income of 20 percent or more.
  • They have demonstrated full recovery from the event.
  • They have completed housing counseling at a HUD-certified nonprofit agency.

Both Simonton and Gregory believe consumers who hope to buy another home are more likely to succeed if they maintain steady employment and have taken steps to re-establish their credit.  Gregory suggests, “Start by setting up and sticking to a household budget.  That way you’ll get into the habit of paying your bills on time, every time. Also request and review your credit reports and credit scores to see where you stand.” 

We all are entitled to receive one free credit report every 12 months from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion.) To order free copies from all three, visit www.annualcreditreport.com.  This is the only website that offers no-cost credit reports without any strings attached.  If you find inaccurate information on any of your credit reports, take the time to dispute it.  The Federal Trade Commission website provides clear instructions on how to do this.

FICO is the most commonly used credit score. To obtain a copy of yours, visit www.myfico.com or any of the three major credit reporting companies. Be prepared to pay a small fee. Also recognize that your credit score isn’t permanent.  With care and effort, it can improve. 

Gregory notes that a person’s bill payment history is the single most important factor when it comes to rebuilding credit, because it accounts for 35 percent of the FICO credit score.  “If you hope to apply for a mortgage, also keep the amount of credit you owe low.  If your car breaks down while you’re preparing to buy a home, don’t go out and buy a luxury ride.  Consider replacing your old car with an affordable, second-hand one instead.”

Savings is another financial factor homebuyers who have faced foreclosure or short sale need to consider.  How much savings is enough?  Simonton recommends that consumers try to save enough to be able to make a down payment of 20 percent. Otherwise they will probably have to pay for private mortgage insurance to safeguard the lender. Gregory says, “Even if you plan to make a smaller down payment, it still makes sense to build as much savings as possible, because you’ll also have to cover closing costs, real estate taxes, interest, and home repairs, and these costs can really add up.”

Gregory also recommends consumers shop around before they select a lender.  “Mortgage providers all have their own loan approval criteria.  If they have different requirements than the FHA or don’t carry the right mortgage products, you could be turned down even if you meet all the federal conditions.”

When asked why homebuyers who have undergone foreclosure or short sale should seek housing counseling, Simonton says, “Working with a housing counselor helps them prepare for the home buying issues they may face due to their situation.  This is still one of the most important financial transactions they will face.”

CCCS’s pre-purchase program is based on standards set by the National Industry Standards for Homeownership Education and Counseling and other HUD requirements and guidelines as well as its own knowledge of best practices.  All of its counselors and educators are fully trained and certified.

If you’ve undergone foreclosure or short sale and wish to schedule an FHA Back to Work pre-purchase counseling session, please call the CCCS Housing Counseling Department at 1-866-731-8486.  When you call for the appointment, ask specifically for this type of housing counseling.  At the session, you will receive a recommended spending plan and detailed case action plan.

Call 1-866-731-8486 or visit the CCCS website to learn more about the agency’s other housing programs.  Clients who complete a CCCS pre-purchase workshop or the online homebuyer certificate program receive in-depth education and personalized counseling.  Pre-purchase group workshops cost $125 per person or $150 per couple.  The CCCS online homebuyer certificate program runs $75 per person.  Couples must pay for two online courses if both are required to receive a certificate.  To enroll in the online program, please visit the CCCS website

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