Return or boomerang buyers have grown in numbers in recent years. Forecasts indicate that these former homeowners who experienced a foreclosure or short sale will return to the market in greater volume in the years ahead. However, lack of knowledge about special financing programs or lender overlays are hampering this group’s return.
Several factors
could hinder a boomerang buyer’s ability to purchase another home including an
impared credit score, a weak job situation, or a family matter. Mandatory
waiting periods for financing through the FHA, VA, or the GSEs also impact
return buyers. As depicted below, the FHA, VA, and GSEs restrict acces to
credit following a foreclosure for a minimum of 3, 2 or 7 years (bottom left),
respectively, though the GSEs are more lenient for a short sale.
However,
if the consumer can prove that they lost their home due to a decline of income,
loss of employment or some family situations they may be eligible for the
extenuating circumstances criteria. Consumers eligible for this program may be
be able to attain financing in as little as a year through the FHA or VA
programs (above right).
The chart above depicts the
distribution of years in which the foreclosures or short sales took place for
return buyers who purchased their subsequent home in 2014.[1] The data is also displayed by the type of financing used.
Because each financing program has a standard and extenuating circumstances
option, one would expect to find two concentrations of buyers in each
distribution: one around[2] the standard time frame and another near the extenuating
circumstances opportunity. This two-hump or bicameral pattern is evident in the
conventional (green), but not for the VA (red) and FHA (blue). The difference
in timing for the VA program is minimal and may result in the single hump.
However, there is only one peak in the FHA’s distribution as well and it is
higher or more concentrated than the other two distributions. Furthermore this
point is four years prior to 2014, suggesting that the bulk of return buyers
who use the FHA’s program are waiting three years and not taking advantage of
the shorter extenuating circumstances option. Likewise, the VA distribution is
most concentrated three years prior to re-purchase, aligning with the two year
wait under the VA’s standard foreclosure definition.
There are four potential reasons for borrowers not taking advantage of the shorter waiting period of the extenuating circumstances program at the VA and FHA:
There are four potential reasons for borrowers not taking advantage of the shorter waiting period of the extenuating circumstances program at the VA and FHA:
- Consumers are not aware of the program,
- FHA and VA customers do not qualify for the extenuating circumstances,
- Lenders are not aware or do not offer the program, or
- Overlays are having an impact on this group’s ability to credit qualify for the program
Unfortunately, we cannot measure
consumers’ awareness of the FHA’s program from this survey nor can we measure
these consumers’ credit scores. Survey work by the FHA indicates that the majority
of former homeowners who were financed by the FHA and experienced a foreclosure
or short sale would have qualified for extenuating circumstances[3], but this does not necessarily imply that they would choose
FHA financing again as pricing was higher for the FHA than conventional in
2014. However, these consumers’ initial choice of FHA suggests that they are
either credit, capital or capacity constrained and would likely choose this
program again. Finally, a review of several lenders’ product offerings suggests
that many lenders do not offer the shorter option[4] for FHA and VA products. Furthermore, because this group’s
credit scores are impacted by distress sales which can take years to recover[5], well documented credit overlays[6] on FHA production could be having a disproportionate impact.
While not definitive, the latter two issues may be constraining this group.
From 2006 to 2014 nearly 9.3 million
homes were foreclosure on or short sold. Homebuyers who experienced a short
sale or foreclosure are returning to the market in growing numbers and will
continue to do so over the next decade. While financing channels have expanded
to provide opportunities for these potential return buyers, limitations
persist.
[1] Special thanks to Brandi Snowden for preparing these cut of
the 2014 Profile of Home Buyers and Sellers
[2] Ability to recover credit score and build down payment as well
as the blend of foreclosures and short sellers may spread re-entry around these
points.
[3] This may be different for owners who used VA or conventional
financing on their initial purchase
[4] See Scotsman Guide’s FHA/VA/Government matrix for September or
October of 2015
[5] For additional details on time to recover credit scores see http://economistsoutlook.blogs.realtor.org/2015/04/17/return-buyers-many-already-here-many-more-to-come/
[6]
http://www.urban.org/research/publication/opening-credit-box/view/full_report
Article
By Ken Fears on Realtor.org
Courtesy
of First Choice Title Services & Escrow, Inc.
First Choice Title
Services & Escrow, Inc
3 SW 129th Avenue, Suite 202
Pembroke Pines, FL 33027
Phone (954) 433-7680
Fax (954) 433-7355
