The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. The real estate market is a key sector contributing to the economic downturn in the U.S. economy. Millions of homeowners have lost homes and face ruined credit ratings due to bank foreclosures. Yet, this fact remains: you can buy a home after foreclosure.
Without a doubt, loss of a home is one of the most traumatic experiences that any homeowner will ever face. Foreclosure is the conclusion of a very stressful and emotional financial period in one’s life.
The foreclosure may not have been completely your fault. The road that led to you losing your home to the bank may have been caused by any number of reasons loss of employment, a life-altering event, buying more home than you could afford, or simply that you just had the wrong loan product from a lender. The reason itself does not matter. The fact is this foreclosure has changed your life. The process of foreclosure has caused you embarrassment, financial strain, anxiety, frustration, and a bad credit debt.
Now you must begin a long road to financial recovery. Any hopes of buying a home in the near future have disappeared, unless you have enough cash to do so.
Banks and mortgage companies will be of little or no help to you, once they see the foreclosure on you credit report. Keep in mind that a foreclosure stays on your credit report for ten years. Most traditional lenders will not even consider offering a home loan to you for the first several years after your foreclosure. They will inform you that you must wait until enough time has passed, in their opinion, and that you have improved and maintained an acceptable credit rating to their standards.
When the time finally comes that one of these traditional lenders will offer you a home loan, it more than likely will be at a premium interest rate and will include funding points. These points are bank fees (one point equals 1% of the loan amount).
This is not good news for those of you trying to get back into homeownership. The loan offer may result in you paying much more than otherwise needed for a home either in up-front closing costs or over the life of the loan itself. Thus, you may be forced to settle for a lesser priced home in order to afford the total loan payment that is being offered by the lender.
Wait. You do have other choices to live in the home you want. One option is to become a renter and begin paying a monthly fee to a owner. You may also consider a Lease Option agreement as a viable alternative if you must rent. Many real estate agents and homeowners trying to sell their homes could present this opportunity to you to get into the home.
Before you agree to either of these options, consider these details in making your decision.
As a tenant entering into a rental agreement with a landlord you will be required to provide the landlord a security deposit, as well as the first and last months rent. This usually amounts to a considerable sum of up-front money at a time when you’re already financially stressed.
In addition to that financial hardship, at the conclusion of your rental agreement you will be left with nothing. You will have no interest in the property and no equity growth. A method to purchase now with no more up-front money than if you rented a home. Your landlord has paid down his mortgage and your landlord has enjoyed a certain amount of equity growth on his property.
If you choose to enter into a lease option agreement with a seller, keep in mind that two agreements are being made at the same time.
The first agreement will be a lease between you and the owner of the property. This agreement makes you the tenant while the seller of the property becomes your landlord. You will be required to make monthly rental payments to the landlord, which may or may not have any deposit credit value (a percentage of the monthly rent payment to be applied to your deposit funds if you opt to purchase the property at the end of the lease). And you will most likely be required to place a security deposit with the landlord and pay him the first and last months rent in advance, as with a typical lease agreement.
The second agreement in a lease-option is the purchase agreement. This agreement will define the option date, price and terms to purchase the property from the landlord. The agreement will convert you from tenant to buyer, and the landlord to seller. The price for the property will have already been predetermined by the seller with you at the time of the original agreement to lease with the option to purchase the property.
The downside to this is that the seller wanted to sell the property originally at a price competitive with market values at the point in time when the agreement is made. By agreeing to lease the property to you with an option to purchase at a later point in time, he will expect you to pay a higher price based on anticipated equity growth for the property. You will also be required to make a full deposit prior to closing, and obtain the balance of the funds by the closing date in order to close on the property.
This simply means that since you have a foreclosure on you credit history you will most likely be required to make a 20% deposit, and to have improved your credit rating sufficiently in order to qualify with a lender for a mortgage loan. If you qualify for the loan you will finally start homeownership and home equity growth once again for you and your family.
The cost of regaining this position is one to three years of rental expense, a down payment of possibly 20% of the purchase price, any loan fees required by the lender to grant and fund the loan, and most importantly paying one to three years of equity growth more for the home.
What if there was another way to get into a home right now? A way, that allows you to start gaining home equity immediately? A way, that starts to rebuild your credit? A way to buy now with no more money up-front than if you rented a property?
Don’t run away from the problem. Face it head on and get back into home ownership reasonably and for not much more than what you would pay to rent a home.
Above all, be realistic. Don’t fall in love with a home you can’t afford. You may convince yourself that if you scrimp and tighten your belt, you can afford it. If you do that, you may put yourself at risk. Buy the home you can afford now and if you’re able later on, you can “trade up” when you can afford a larger house.
Don’t plan other big purchases or other big ticket items right away unless absolutely necessary. Build an “emergency fund” into your budget. Put a little away each month for the unexpected. That way when the car needs repair or the house needs a new roof you won’t be tempted to reallocate funds from existing financial responsibilities.