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Boomerang Buyers: Is There Homeownership After Foreclosure?

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Roughly 7 million Americans lost their homes during the Great Recession. Now, seven years on, the first wave of those consumers might be ready to dip their toes back into the housing market, as their credit reports are finally clean of that negative entry. The group has been dubbed “boomerang buyers.” There’s disagreement about how many of this group will — or already have — decided to take the plunge back into homeownership, and how much that might help the economy. But it’s possible the boomerang group could suffer from being once bitten, twice shy as they weigh their new options.

It takes seven years for negative events like foreclosures to disappear from a consumer’s credit report, though the impact of the event lessens over time. Also, mortgages sold to consumers only five years after a foreclosure can be re-sold to Fannie Mae and Freddie Mac, making this group attractive to banks. Consumers who engaged in short sales get an even earlier reprieve — their loans can be re-sold after three years.

According to FICO, the seven-year anniversary of a negative event doesn’t necessarily mean a dramatic difference in credit scores. A consumer who filed for foreclosure with a less-than-great credit score of 680 could see their score restored to that level in as little as three years, for example.

“While a foreclosure is considered a very negative event by your FICO score, it’s a common misconception that it will ruin your score for a very long time,” according to FICO. “In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years.”

Re-Entering the Housing Market

Still, much has been made of the seven-year “anniversary” of the Great Recession. The National Association of Realtors this week said that it believes 950,000 formerly distressed homeowners have become re-eligible for mortgages and have “likely” purchased homes, and another 1.5 million will re-enter the market during the next five years.

“The deep wounds inflicted on the housing market during the downturn are finally beginning to heal as distressed sales continue to decline and home prices in some parts of the country have bounced back to their near-peak levels,” said Lawrence Yun, chief economist for the Realtors organization. “Borrowers with restored credit will likely have the ability and desire to own again, encouraged by the long-term benefits homeownership provides in a stronger economy and more stable job market.”

Access to mortgages is increasingly important as rental markets overheat in much of the country — in some places, owning is cheaper than renting, at least based on monthly payments.

But not everyone agrees with the Realtors’ calculations that millions of consumers have or will be become boomerang buyers.

Housing analyst and loan manager Logan Mohtashami believes the numbers are far lower, citing Federal Housing Administration data showing only about 2,000 buyers with foreclosures on their records used FHA loans last year. Consumers can get FHA mortgages in some circumstances only three years after a bankruptcy.

“The market (for boomerang buyers) just isn’t as good as they think it will be,” he said. “Forget about the timeline (for clearing their credit reports). People in this group have to re-establish credit, and they have to have a down payment, which Americans with good credit and three jobs have trouble with.”

Mohtashami has seen a few boomerang buyers in his office. All of them have been short-sellers rather than foreclosure victims, he said.

“Those people look a lot better as candidates right now,” he said. “Many of them never missed a house payment.”

To Buy… Or Rent?

RealtyTrac data indicates 7.3 million consumers lost their homes between 2007 and 2014. The vast majority experienced foreclosure — 5.4 million. Still, that leaves 1.9 million short-sellers who might be excellent candidates to buy a home again.

Many in the group may not be in the mood, however. Once kicked out of homeownership, twice shy — and renting does have advantages.

“I won’t be buying again. I pay a decent rent now, and everything gets fixed and taxes get paid for me,” said one consumer, who asked that her name be withheld. “I would rather invest my money and have more for retirement rather than a house which ends up being a big money pit all over again.’

Still, with rents rising at twice the rate of wages since the year 2000, consumers can’t write off the idea of homeownership.

RealtyTrac says that the Phoenix area has the most potential boomerang buyers, with 350,000 potential buyers from 2015 to 2022. And the best year for boomerangs will be 2018, with 1.3 million consumers enjoying credit reports that are clear of their housing loss.

“The housing crisis certainly hit home the fact that homeownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance at homeownership,” said Chris Pollinger, senior vice president of sales at First Team Real Estate, in a report issued by RealtyTrac. “Homeownership done responsibly is still one of the best disciplined wealth-building strategies, and there is much more data available for homebuyers than there was five years ago to help them make an informed decision about a home purchase.”

As your credit recovers from an event like a foreclosure or a short sale, it’s especially important to check your credit reports and credit scores. You can get your free credit report summary updated every month on Credit.com to track your progress and watch for errors.

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  • http://www.bottalicolaw.com Arnold Bottalico, Esq.

    The homeowners who lost their homes to foreclosure and are seeking to buy again have to overcome tightened loan requirements. I would assume that these folks, if approved for a new mortgage, must have significantly improved their credit score and have sufficient income. The loose lending standards prior to the financial crisis are over and if it stays this way then the chances of another foreclosure epidemic will be significantly decreased.

  • jac

    Hi there,

    I took out 2 loans (mortgage and HELOC) in April 2006 and went into default in August 2008. My credit took a nose dive for awhile, but now that it has been 7 years since my last payment, those accounts have both dropped off of my credit reports and my credit score is now averaging 750. I live in NY however and the foreclosure process has taken a very long time! The bank that now owns the HELOC loan filed a lis pendens at the end of 2013 and last week my home went to auction (7 years after the first date of default). My question is: since the auction just happened, do I need to wait another 7 years in order to take out another mortgage even though my credit is back to normal? Or does the 7 years start from the date of first default? I’ve heard conflicting information. I’m assuming that I may have to wait another 7 years. Please let me know.

    Thank you!

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