Chris Noblejas, a former real estate agent, got hit by a double whammy during the housing crisis. His income declined drastically, and so did the value of the Gaithersburg, Md., townhouse he bought for $480,000 in 2006. He ended up selling the townhouse in a “short sale” in 2010 for $320,000. A short sale occurs when a lender agrees to accept a sales price for a home that is less than the amount owed on the property.
But Noblejas was able to buy a single-family house in Silver Spring this year. He is part of a wave of “boomerang buyers” — people who are reentering the housing market after a foreclosure or short sale.
“I wanted to buy a house again, but I was still nervous because I made such a bad mistake before,” Noblejas says. “Even renting was hard when I first lost my house. I didn’t even know if I could buy again, but I talked to a loan officer and was able to qualify for an FHA [Federal Housing Administration] loan. I plan to refinance that loan into a conventional loan as soon as I can to get rid of the mortgage insurance payments.”
Boomerang buyers who lost a home to a foreclosure or short sale between 2007 and 2013 are projected to make about 10 percent of all U.S. home purchases in 2014, according to John Burns Real Estate Consulting (JBREC). The Washington area is among those regions that are expected to have even higher levels of activity involving boomerang buyers. JBREC expects boomerang buyers to make 17.5 percent of the region’s existing- and new-home purchases this year. According to JBREC, the number of boomerang buyers will increase in 2015 and 2016 as more former owners become eligible for new loans.
How quickly someone can bounce back from a foreclosure or a short sale depends on the reasons for the past financial problems and on the person’s current credit score. A would-be borrower who had good credit history before a job loss, for instance, is more likely to qualify for a new mortgage than one who had bad credit and continues to demonstrate poor financial habits.
Ashley Lawrence and her husband, Joel, bought a house near Orlando in July 2007 for $200,000 with a zero-down-payment loan. Then, in October 2008, Joel was laid off by CarMax, along with about 600 other employees. After struggling to modify their mortgage, the couple negotiated a short sale in 2010 for $77,400.
“We always wanted to buy again, so we rented for a while and moved in with family for a year to save money,”Ashley Lawrence says. “We rebuilt our credit, and my husband got a good job in Virginia now, but we’ve moved every year since we lost our first house, which has been tough on our kids, who are now 7 and 4. ”
The Lawrences recently qualified for an FHA loan and bought a home in Spotsylvania County with the help of Jami Harich, a real estate agent with Avery-Hess Realtors in Fredericksburg, Va.
“Most buyers I work with now, especially if they lost a home in the past, don’t want to get in over their heads,” Harich says. “They start with a monthly payment that they want to stick to, and then I show them what they can find on the market that fits in that budget.”
When someone can borrow again depends, in part, on whether the loan is a conventional mortgage or a government-insured mortgage.
“FHA loans are easier to get after a short sale. In fact, some borrowers don’t have to wait at all if they never had any late payments on their mortgage,” says Steve Cohen, a senior mortgage banker with Talmer Bank and Trust in Rockville, Md. “Borrowers who were in default on their loan have to wait three years to qualify for an FHA loan.”
After a foreclosure, VA loans — guaranteed by the Department of Veterans Affairs — have the most lenient rules, with just a two-year waiting period to qualify for a new mortgage, says Hope Morgan, branch manager of Mortgage Network in Salisbury, Md. And no down payment is required.
Cohen says conventional loans require a two-year wait after a short sale for borrowers who can make a 20 percent down payment. The wait is four years with a 10 percent down payment and seven years with a 5 percent down payment. Borrowers who lost a home in a foreclosure — and, therefore, were in default on the mortgage — typically must wait seven years to qualify for a new conventional loan, he says.
“However, all of these waiting periods can be shortened with extenuating circumstances, such as a job loss, a divorce, a serious illness or the death of the person who was the primary wage earner,” Cohen says.
The FHA introduced a Back to Work loan program in 2013 to address the needs of individuals and families who lost their homes because of the housing crisis and recession. The program requires housing counseling before a new loan can be approved.
“The Back to Work program lets people reapply in as little as 12 months after a foreclosure or bankruptcy, as long as the borrowers can prove that their income dropped by 20 percent or more due to a job loss or cut in pay,” says George Beylouny, branch manager of Silverton Mortgage Vinings in the Atlanta area.
“The borrowers need to be able to document the reason for the foreclosure or short sale and show that they’ve been responsible with their credit before and after they lost their home. A drop in credit score is okay as long as they can show they had good credit before the crisis.”
Morgan worked with one recent buyer who lost his job in July 2009 and then lost his home to foreclosure in January 2011 when he couldn’t keep up with his loan payments.
“He got a full-time job just before the foreclosure, but the lender told him it was too late,” Morgan says. “Now he was able to buy again because he waited three years and was able to outline his whole story and explain that he tried as hard as he could to be responsible and repay the loan.”
Cohen says the same guidelines apply to boomerang buyers as other would-be borrowers — the same minimum credit score, typically 620 or 640 for an FHA loan; down payment requirements; and debt-to-income ratio, which generally must be under 43 percent.
Most borrowers have learned that they need to be more careful about what they buy and to avoid overextending themselves, Cohen says.
They “want to build equity and want to make as big a down payment as they can,” Cohen says. “Even if it’s a 3.5 percent down payment on an FHA loan, that’s better than the old days of zero-down-payment loans. In this area, saving up 3.5 percent for a $300,000 home means you need at least $10,500, plus you need more for closing costs and cash reserves, so that represents a good effort to save for most people.”
Cohen says borrowers today typically plan to stay in their homes at least five to seven years, instead of assuming that they can buy and sell within a year or two. In addition, he says, borrowers are telling him that they don’t want to know the maximum amount they can borrow; they just want to know what they can comfortably afford.
Morgan tells another cautionary tale.
“One woman I worked with recently told me that when she graduated from college, she took every credit card she was offered and had no concept of managing money,” Morgan says. “She and her husband had kids and bought a house, and then her husband left and she lost the house. Now she’s rebuilt her credit and has a good job and could qualify for a $350,000 loan, but she’s buying a $150,000 home because she wants to feel more comfortable that she can afford the payments.”
Ashley Lawrence says she and her husband saved up for a 3.5 percent down payment, unlike the first time they bought a home, when they made no down payment.
“Next year, I finish nursing school, so as soon as we have two incomes, we plan to finish the basement to add equity to our home and to refinance into a conventional loan so we can get rid of the mortgage insurance we pay on the FHA loan,” Lawrence says. “We were so naïve when we bought our first place and realize now that we paid way too much for it. This time, we did a lot of research and found a Realtor and a lender we could trust to help us make a smarter decision.”
Noblejas also used 100 percent financing to buy his first home, but this time, he saved enough to make a 10 percent down payment.
“I was preparing to make a down payment of 20 percent so I could avoid mortgage insurance, but I decided to keep some more money in cash reserves for now,” he says. “I plan to refinance out of my FHA loan and into a conventional loan as soon as I can. The biggest lesson I learned is how important it is to save a lot more money than you think you need because you never know when you’ll need it.”
Noblejas says he understands better now than he did before how big a decision it is to buy a home and how important it is to be prepared financially for the consequences if you make a bad choice or experience economic hardship.
And if the bottom falls out? It’s possible to recover, Beylouny says.
“If you’ve lost your home to a foreclosure or short sale, the important thing to remember is that it’s not the end of the world: Life has its ups and downs,” Beylouny says. “You should talk to a lender because even if you can’t be approved today, we can set you up with a road map for the future so you can buy again.”
Michele Lerner is a freelance writer.