It’s been a tumultuous and brutal seven years or so. Those who never thought they’d consider bankruptcy, face foreclosure or learn about short sales may have experienced one, two or all three. “Loan modification” entered our collective vocabulary.
As home values leveled off and dropped dramatically, some owners faced mortgages they couldn’t or wouldn’t pay.
Some looked at their numbers strategically and bailed on homes with severely underwater mortgages. Others faced heartbreaking home losses they didn’t want.
But understanding the mortgage crisis, and how to move forward, can get you back in the real estate game.
Causes of mortgage crisis
In the early 2000s, the dream of homeownership was attainable for many, as mortgage interest rates were low and payments were reasonable. With home prices escalating, real estate seemed to be a great investment.
For homeowners, increasing equity strengthened their financial portfolio and may have led to refinancing for an influx of cash. The cash-out refinance assisted with debt, expenses and purchases that provided an enhanced lifestyle.
Banks marketed easier access to loans. Some borrowers entered into higher-risk loans that let them state their income without verification or that had adjustable interest rates.
Unfortunately, home prices abruptly stopped increasing, and the mortgage crisis began.
But many who experienced this crisis now may be on the road to recovery.
How to move forward
One of the most common questions loan officers get is, “Can I buy a house now?”
Here are the general guidelines. There can be variances and exceptions, and all loans face the detailed scrutiny of a lender’s underwriting department.
For Federal Housing Administration-insured loans, the “seasoning” period before one can buy a home is shorter than for commercial loans. (The FHA is part of the U.S. Department of Housing and Urban Development.)
A borrower who has had a short sale or a foreclosure faces a three-year wait from the completion date to buy again.
Borrowers who have had a Chapter 7 bankruptcy must wait two years from the discharge or dismissal date. In the case of a Chapter 13 bankruptcy, one may purchase a home a year after the payout has elapsed.
For Veterans Affairs-guaranteed home loans, the wait is two years from completion of a foreclosure or short sale.
Conventional loans, by contrast, are not guaranteed by the federal government, typically cover A-paper loans (for those with a credit score over 680, two months mortgage in savings, low debt-to-income ratio) and, with 20 percent down, may not have mortgage insurance. These loans have stricter requirements.
If financial mismanagement was involved, the wait is seven years. For extenuating circumstances — such as job relocation — it may be three years.
Loan process preparation
As fewer homes are foreclosing and being short-sold, inventory is dropping — and the advantage now goes to the seller.
Lending standards are strict. You’ll need to hand over significant documentation for income and assets, and letters of explanation are the norm.
A realtor can guide you through buying a home after you’re prequalified by a mortgage lender for financing.
Many people are buying homes again. It might be the right time to get back in the market.
• Carla Carroll is a senior loan officer at Diversified Capital Funding in Tracy. Comments can be sent to firstname.lastname@example.org, or she can be reached directly at 914-3753 or email@example.com.