The Great Recession was one of the hardest times in the real estate world for the U.S. It started in December of 2007 and lasted until June of 2009. The Great Recession began because of a crash in the housing industry. With a failure in the housing industry, consumers stopped consuming. With less consumption and an unstable financial market, businesses stopped being invested in. When businesses were no longer being invested in, people started losing their jobs. Once people started losing their jobs, their financial situation declined rapidly.
Unfortunately, the Great Recession’s effects did not just occur between the years 2007-2009. The effects are still being dealt with today, and one of the major effects in the real estate world was an increase in foreclosures and short sales. The problem is that once a person experiences a foreclosure or short sale, it is difficult to come back around and become a homeowner. It is, however, not impossible. There are ways to bounce back after a foreclosure.
Going through a foreclosure is not an unusual experience. Across the U.S., there were approximately 9.3 million homeowners who experienced a short sale or foreclosure between 2006 and 2014. In San Diego County, between those same years, there were over 100,000 residents that went through a foreclosure or a short sale.
Typically, there are more foreclosures that occur than short sales. A foreclosure occurs when the homeowner is no longer able to make the correct payments on their property. Once this occurs, the lender has the authority to take the property away from the homeowner and sell it to compensate for the money the homeowner was unable to pay. A short sale occurs before the homeowner reaches the point of a foreclosure. The homeowner and the lender have to mutually decide to sell the home when the mortgages are higher than the actual value of the property. The borrower and lender lose, but if the home were to reach a point of being foreclosed, both parties would lose more.
San Diego County reached its peak of foreclosures in the middle of the Great Recession. In 2008, the county had over 21,000 homes foreclosed. Since then, the number of foreclosures has slowly decreased, reaching fewer than 5,000 homes foreclosed on last year. The number of homes that have underwent a short sale reached a high in 2012, with close to 9,000 homes. But in the last two years, that number has dropped rapidly, with less than 2,500 in 2014.
After experiencing a foreclosure, the idea of purchasing a home again may seem impossible. A previous homeowner is going to know the work that it took to buy a home and keep a home. And after one experience going south, it can seem intimidating and nearly impossible to be able to reach such a position again.
But it isn’t. There are ways to come back.
The biggest effect of a foreclosure and short sale is a damaged credit score. The severity of the impact a foreclosure and short sale has on a credit score is different as it is dependent upon the lender. Some lenders view a short sale just as bad as a foreclosure. Others are going to see the foreclosure as a better indicator of an inability to pay debts than a short sale.
To improve a person’s credit score, it is going to take time. Little steps of proving one’s ability to make wise financial decisions will not happen overnight. A person is going to have to prove that they are financially responsible by paying his or her bills at the right time, only using around 10% of his or her credit limit, saving money, and not having a substantial amount of debt. The foreclosure is not going to be taken off of a person’s credit report until it has been over 7 years. However, a person may be able to purchase a home before then.
The key to being able to purchase a home again is going to be finding a way to finance a new home. After working at improving one’s credit score through the little choices made, a person is going to have to find a lender who is willing to loan money to him or her. After experiencing a foreclosure, lenders are generally going to want the previous homeowner to be prepared for a higher down payment. Every lender is going to have different requirements.
- Fannie Mae and Freddie Mac loans are going to require the person wait the full 7 years.
- VA loans require a wait of 2 years.
- FHA loans require at least 3 years. However, if a person is able to prove that the reason he or she underwent a foreclosure was due to circumstances out of his or her control (medical emergency, employment loss, catastrophe), the person may only have to wait a year.
December 2014 was exactly 7 years since the beginning of the Great Recession. That means that everyone who lost their home due to a foreclosure during the Great Recession has just started having their history of a foreclosure wiped off their credit report. Seven years is a long time, but if you take the right steps after your foreclosure, you can minimize those years and find yourself a new home sooner rather than later.