Homeowners who were laid off and lost their homes to foreclosure could qualify for a new mortgage in as little as a year under an unprecedented federal rule change that slashes the usual waiting period between financial disaster and buying a new house.
Normally, homeowners who were foreclosed on must wait three years before they can qualify for a loan backed by the Federal Housing Administration. FHA loans require only a 3.5 percent down payment and have more lenient lending standards than conventional loans, though borrowers have to carry long-term mortgage insurance. Getting a conventional loan after foreclosure can take up to seven years.
The new changes allow borrowers who meet a set of strict criteria to qualify for an FHA loan only 12 months after losing their house for failure to make payments.
"To get A-paper institutional financing so soon after a foreclosure is unheard of," said Brent Wilson, with Comstock Mortgage in Sacramento. "It should increase the buyer pool throughout the country."
The FHA announced the changes Aug. 15 in a letter to lenders titled "Back to Work Extenuating Circumstances." Officials say it was meant to acknowledge the reality of the recession, with its mass layoffs, and to help people return to home ownership.
"We've just been through an economic shock in this country when people lost their jobs through no fault of their own," said Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development, which oversees the FHA. "Now we're in a recovery, and many borrowers have become re-employed and are able to sustain a mortgage again."
To qualify, borrowers must fit the FHA's profile of those who deserve an early second chance.
They must have have lost their homes in a foreclosure or short sale because they were unemployed or experienced a big drop in household income due to circumstances "beyond the borrower's control." They have to show they have recovered financially and otherwise have a clean credit record. And they have to complete housing counseling.
The new guidelines are gradually gaining attention.
"We're still in the digestive mode," said Dan Starelli, senior vice president with Umpqua Bank in Sacramento.
Some say the new rules are a breath of hope for former homeowners and for the housing market, which would benefit from a new pool of potential buyers.
In the Sacramento region, where thousands of residents lost their homes when values plummeted and unemployment spiked into the double digits, many could meet the FHA's new standards, experts said.
"There are a large number of people who are going to fit these criteria," said Chris Little, president of the Sacramento Association of Realtors. "For a lot of people, it could get them back in the game."
Sooner is probably better for buyers, he said.
Despite strong upward pressure on home prices in the past year, they remain far below the peak of last decade's bubble. Mortgage rates have risen from a low of less than 3.5 percent earlier this year to around 4.5 percent today but remain a bargain in historical terms.
Cash-paying investors have dropped out of the market as prices rise, leaving room for those with FHA loans and lower down payments to jump in after being virtually shut out for most of the past year. A growing supply of homes for sale is also helping to stabilize the market.
"There are so many fewer cash buyers," Little said. "Prices are floating up to where investors don't perceive it as the screaming deal they did a year ago. It allows (traditional buyers) a better crack at getting into the mix."
Pat Shea, president of Lyon Real Estate in Sacramento, said many buyers have been waiting for a chance to take advantage of prices and interest rates that are still relatively affordable.
Real estate agents and homebuilders have been counting on these so-called "boomerang" or "recovery" buyers to help bolster sales in the next few years.
"These people owned homes before," Shea said. "They want to own homes again. There will be hundreds of buyers coming back."
Lenders regard the changes with some skepticism.
Starelli, with Umpqua Bank, said his financial institution is unusual because it services its own loans. That means it can start implementing the new FHA standards without holdup.
"From our standpoint, we're going to go directly with this guidance," he said.
But many other lenders sell packages of loans to investors, who have their own underwriting criteria.
"Just because FHA makes the changes doesn't mean all lenders will do it because the investors won't allow it," Starelli said.
Many people lost their jobs and homes in the recession more than three years ago and can already qualify for an FHA loan, he noted.
Starelli also said he thought it was unlikely that someone who went through a foreclosure only a year ago would have recovered their income and credit worthiness enough to meet the FHA's new standards.
Comstock's Wilson said he thinks the FHA's changes are meant to increase business after it raised its mortgage insurance premiums earlier this year and extended the insurance payments over the life of its loans. The changes make FHA-backed loans more expensive and less attractive then they once were, driving away borrowers, he said.
"I'm a big fan of conventional financing," Wilson said. "I advise against FHA as much as I can if people are qualified."
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