- October 5, 2017
The financial crisis that started in 2008 caused many homeowners to lose their properties to foreclosure, deed-in-lieu or short sale. This is referred to in the mortgage industry as an “adverse event,” and will affect one’s ability to get a mortgage after the crisis has passed.
Many people feel that the stigma of foreclosure will haunt them for the rest of their lives, forever keeping them from becoming homeowners again. While an adverse event presents some challenges to someone coming back to the market—hence the term, “boomerang”—it is by no means a permanent barrier.
First, let’s clarify what these events are, and explain how to recover from them. Be aware there are different guidelines for conventional, FHA and VA loans.
When a lender makes a loan to buy or refinance real estate, the property is its security for that loan. If the homeowner does not make the payments as agreed, the lender can force the sale of the property to get its money. This is called foreclosure.
Homeowners may choose to avoid the ordeal of foreclosure by simply deeding the property back to the lender. This is called “deed-in-lieu of foreclosure,” or simply, “deed-in-lieu.”
Many homeowners, knowing that they owed more on their homes than they were worth, sold their homes as “short sales.” This meant that the lender agreed to accept less than the outstanding balance when the property was sold. Lenders refer to this as a “pre-foreclosure sale.”
A buyer will have to wait seven years from a foreclosure to qualify for a new conventional mortgage. If they did a short sale or deed-in-lieu, that time drops to four years.
A possible loophole
A borrower may be able to claim that “extenuating circumstances” were responsible for their financial woes. These are specifically defined as, “non-recurring events that are beyond the borrower’s control that results in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.” They must document these events thoroughly; a simple letter of explanation won’t be sufficient. The lender requires divorce decrees, medical reports or job severance notices to confirm acceptable extenuating circumstances.
FHA and VA loans
These guidelines are more forgiving. FHA loans require three years from a foreclosure, deed-in-lieu or a short sale. VA allows just two years to have passed.
Extenuating circumstances can shorten these time frames as they do for conventional loans. For FHA loans, the criteria are a bit more exacting; a homeowner who received a job transfer and couldn’t sell his property would not be able to claim extenuating circumstances, for example. A decrease in income is not by itself an extenuating circumstance for an FHA loan, but it may be acceptable if there is other supporting documentation.
VA loans are more lenient. They require just two years from a foreclosure, deed-in-lieu or short sale. A buyer may be able to claim extenuating circumstances, but they are largely up to the underwriter’s discretion.
What to make of this
The events following the 2008 crisis and the ensuing recession were traumatic for many. Job losses or changes, transfers, and plummeting real estate values all caused people to lose hope of ever getting the life they hoped to have. But there is always hope. No one should assume they are forever locked out of the housing market because of earlier financial tribulations. They should look at their situation with fresh eyes, with some knowledge, and the realization that the dream of homeownership is still attainable.