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Millions are returning to the homebuying market — here’s what you should know

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Takeaways:

  • Millions of people who lost their homes in the recession are now ready to buy again.
  • Boomerang buyers now have more loan options.
  • Rebuilt credit is the most important part of the homebuying equation.

There are many who defaulted on their mortgages because of a job loss or personal disaster, who otherwise would have paid responsibly. These defaulted mortgages resulted in short sales or foreclosures. These defaults were the product of decisions made by homeowners in distress — they aren’t representative of the homeowners’ character.

These former homeowners are in the millions, and many want to — and are ready to — become homeowners again.

According to the most recent U.S. Census figures, around 12 percent of all U.S. households — more than 14 million people — rented a single-family home in 2011 alone.

Three-fifths, or 8.4 million, of people who lost their homes to short sales and foreclosures in the past seven years ended up renting, with many others not even being able to afford to pay rent.

Subprime lending is back and very much alive

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With the gradual but surely rebounding real estate market, some private equity firms are now willing to take higher risk for greater yields to accommodate this discounted market.

Many lenders have sprung up to meet this demand. Some are approving borrowers in as little as weeks after a foreclosure. Credit profile is not an issue; however, a higher down payment is required with an expected above-market interest rate.

Because the guidelines are looser and fall outside of the Consumer Financial Protection Bureau’s “qualified mortgage” rule, loans are kept by these firms for future securitization.

New Penn Financial LLC, a lender based in Plymouth Meeting, Pennsylvania, and Drop Mortgage in Encinitas, California, are some of today’s players in a field that will soon become increasingly crowded.

Boomerang buyers have more loan options

Most victims who lost their homes in the recent recession are unaware of the waiting periods for a new loan secured by Fannie Mae, Freddie Mac, FHA and VA following a mortgage default or bankruptcy.

They suspect that they don’t qualify for a mortgage today. Fannie and Freddie waiting periods are similar: For a short sale, deed in lieu or bankruptcy, it’s four years, while foreclosure is seven years.

FHA is little different: For a short sale, deed in lieu or foreclosure, it’s three years, and only two years for bankruptcy.

VA waiting periods are even shorter: two years for all mortgage defaults and Chapter 7 bankruptcy. Rebuilt credit is a prerequisite by all to qualify for a new loan.

Furthermore, many people today also are taking advantage of FHA’s Back to Work program.

In as little as one year, people who experienced periods of unemployment or other severe reductions in their household income and were forced into a mortgage default or even full-blown bankruptcy could be approved with as little as a 3.5 percent down payment.

Major lenders consider this program risky. They believe it puts them at greater risk to buy loans back. Still, there are a number of lenders who are delivering limited numbers of these loans. Contact FHA for more information.

The importance of rebuilt credit

Many agents and lenders continue to increase their understanding of the subject that is perhaps the backbone of the real estate industry — credit.

They are learning to pass on responsible practices, useful tools and genuine resources to their clients.

Just last week, JPMorgan Chase & Co. and Wells Fargo & Co. said that consumers who have suffered in the recent recession are meeting their financial obligations more regularly than they have in more than a decade. Bravo!

Well-informed real estate professionals are today’s winners

To create a well-informed and indebted client, it’s certainly worth learning about valuable resources and tools that are always available for free from genuine and trusted websites such as the Consumer Financial Protection Bureau, Federal Trade Commission and FICO.

The true impact of mortgage defaults on credit score from FICO

I was fortunate to be given a rare and exclusive on-camera interview with Craig Watts, former public affairs director for FICO for 14 years.

I sat down with Watts and asked specific questions regarding mortgage defaults (short sale, deed in lieu and foreclosure) and bankruptcy impact on FICO score, as well as ways to bring mortgage default victims back to homeownership.

The interview is available on my website to watch for free.

Real estate professional and lenders have the opportunity to transform a transaction into a relationship. They can do that by helping convert tenants to would-be eligible homebuyers. They can also help clients put past economic woes behind them and help them move away from renting and toward buying a home.

I encourage you to educate, empower and prosper.

Nabil Captan is the founder and CEO of Captan and Company. You can follow him on Twitter @nabilcaptan or on LinkedIn.

Email Nabil Captan.