Families of Foreclosure Quickly Returning Back to Home Ownership

by 20 May 2012

(TheNicheReport) -- After Jennifer Anderson's family lost their home because they could not make the mortgage payments, she did not expect to be able to purchase another home for a long time. Surprisingly, the Anderson family was able to purchase another home within two years for $297,000 near Phoenix, Arizona, using a loan program sponsored by the U.S. Government.

The Andersons are part of a small but increasing number of families who are quickly returning to home ownership after defaulting on their mortgages or selling their homes through short sales, which creates losses for the banks.

Jennifer's family got into financial trouble when she was fired from her job as a customer service representative, and her husband had his hours cut at his job with an automaker. The problem got even worse when they depleted Jennifer's retirement savings trying to save their home.

This resurgence of home ownership is being made possible with help from the U.S. Government through the Federal Housing Agency (FHA). FHA insured loans have risen dramatically in recent years as fewer Americans are able to qualify for conventional mortgages with Freddie Mac and Fannie Mae. Fed Chairman, Ben Bernanke, noted that many creditworthy buyers cannot get mortgages because the banks have become too strict in their lending policies. He doesn't expect this to change any time soon.

The qualifications for FHA loans are much less restrictive than conventional loans. FHA only requires a minimum credit score of 620 with a 3.5 percent down payment compared to conventional loan requirements of a minimum credit score of 720, a larger down payment and proof of income.

However, FHA loans are slightly more expensive. Their interest rates are higher than conventional loans, and there is a 1.75 percent upfront mortgage insurance premium combined with a 1.25 percent premium paid annually on the outstanding balance.

FHA loans accounted for 30 percent of home purchases during 2011 compared to only 4.5 percent in 2005.

Some economists see a rising problem with the increase in FHA loans. They point out that the low 3.5 percent down payment requirement is eerily similar to the low requirements of the subprime loans whose defaults led to the crash of housing prices in 2006. Edward Pinto, a fellow at the American Enterprise Institute, pointed out that around 15 percent of borrowers with credit scores from 620 to 659 have a high probability of default.

FHA loans are giving people a second chance at owning a home. Lenders look at the reasons a loan applicant defaulted on their previous mortgage, such as a loss of job, and take into consideration their attempts at rebuilding their credit. Even home builders are getting on the bandwagon by offering credit counseling courses to potential buyers.


Should CFPB have more supervision over credit agencies?