More Americans With Tainted Records Buying Homes Again

Despite ominous reports on economic growth, unemployment and foreclosure rates, a growing number of Americans are quickly returning to homeownership after defaulting on their loans or being forced into short sales. Reuters News conducted interviews with more than 30 lenders, builders, realtors across the United States, and their sentiments suggest that more people are getting back into the housing market despite having a foreclosure, bankruptcy or short sale on their credit report.

The increase can largely be attributed to the number of FHA backed loans in the market. FHA loans have soared as subprime loans have disappeared and fewer Americans have qualified for conventional mortgages. (A number of such loans backed by Fannie Mae and Freddie Mac, were rescued in 2008 by the U.S. government).

Critics say that these loans are made to consumers with credit scores of 620 to 659, which have about a 15 percent failure rate; a high risk compared to loans made to people with 720 scores. They also caution that the requirement that borrowers taking FHA-backed loans make a down payment of just 3.5 percent of the purchase price (as opposed to 20 percent) brings back bad memories of subprime mortgages.

Nevertheless, these new homeowners have worked diligently to improve their financial condition, and their previous misfortunes are viewed differently. A bankruptcy remains on a consumer's record for seven years, but that consumer can start raising his or her credit score in several months by decreasing debt, not borrowing more and paying bills on time.

In addition to a minimum credit score of 620, more lenders are looking at why a person lost their home. Essentially, loan officers are learning that applicants who had a foreclosure due to job loss may not have the same risk factors as those who had reckless spending habits, or who chose strategic foreclosure as a way to obtain a lower interest rate.

As such, the specter of financial distress is not the same barrier to future homeownership. If you have questions about life after bankruptcy, foreclosures or short sales, an experienced bankruptcy attorney can advise you.