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After foreclosure, boomerang back into homeownership

More than four years past the worst of the housing downturn in which millions of Americans lost their homes to foreclosure, the lure of homeownership is still strong enough to bring these so-called "boomerang buyers" back into the market.

Despite lengthy waiting periods, boomerang buyers represent a growing force of borrowers eager to own again.

According to Moody's Analytics, by the first quarter of 2014, as many as 1.5 million people will be eligible to buy again after foreclosure.

Based on data from a loan eligibility app he recently introduced on his website AfterForeclosure.com, Jon Maddux, a former San Diego-based mortgage broker, says 23 percent are eligible to purchase again, and 87 percent of those eligible are interested in buying again.

Waiting period and guidelines

For FHA and USDA loans, the waiting period after a foreclosure is three years. For VA mortgages, the waiting period can be as brief as two years.

However, for a Fannie or Freddie-backed loan, you could face a waiting period as long as seven years following a foreclosure. If you had opted for a short sale or deed-in-lieu, your waiting period could be less. You could even be eligible for a loan after only two years if you put 20 percent down, but your lender must accurately report your short sale or deed-in-lieu as such to the credit bureaus so your records don't reflect a foreclosure.

The waiting period generally begins from the time your name is removed from the foreclosed property's title. If you were a previous FHA borrower and looking to get another FHA-insured mortgage, your waiting period begins from the time the FHA insurance claim was paid on your previous property.

The guidelines post-foreclosure aren't that different, says Scott Schang, a branch manager with Broadview Mortgage in Orange, Calif. "It is exactly the same qualifying for an FHA or Fannie Mae, Freddie Mac loan whether you had a foreclosure or not. The credit scores are the same, the debt-to-income ratios are the same, the down payment requirements are the same."

Challenges post-foreclosure

One of the biggest challenges consumers face post-foreclosure is discovering that the waiting period hasn't begun when they expected, say Schang.

"Because of the challenges in the mortgage markets, the banks are not foreclosing on the property. That's probably one of the biggest challenges, with the foreclosure not occurring after people stopped making payments. And that postpones their waiting period."

This often happens to those who have filed for bankruptcy. Just because your lender has stopped reporting your mortgage on your credit report doesn't mean the actual default has happened. This means you could still be on the title for the property until the actual foreclosure occurs. You can check records in the county recorder's office to find the actual date of your foreclosure.

Another thing to watch for is that there are no second-mortgage-related payments outstanding on the foreclosed property. While a foreclosure typically frees you from these obligations, some lenders might still try to collect. This is why it is important to keep all the paperwork relating to your foreclosure. You might need to work with a credit repair professional or lawyer to handle such issues.

Credit repair

No matter how long your waiting period is, that time should be spent repairing your damaged credit.

"The impact on your score is unique to your own financial DNA," says Michael Edgar, real estate broker in Boise who works with Advanced Credit Solutions of Idaho to provide credit repair services. "It's determined based on all the other reports you have open. I've seen people with short sale or foreclosure on their home and their score went from a 780 to a 720. I've seen people go all the way from a 750 to a 595."

In order to improve your credit score, Edgar suggests opening up a prepaid lending account with a credit union or apply for prepaid credit card accounts to open up a new credit history. Try not to have an outstanding balance of more than 30 percent of the credit limit you have available, he says.

Don't be afraid to own again

Schang says borrowers who come back into the market tend to be more discerning about the next loan they might take on. And for those who "walked away" or strategically defaulted, Schang say, "Underwriting guidelines are never very specific. There is no way to indicate whether a foreclosure was strategic. There are no special penalties or guidelines that specifically address strategic default."

The lure of homeownership is still very powerful, says Maddux. "There's a strong desire for homeownership in America. People want to set down roots and have stability for their family."

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