NEW YORK (MainStreet) — Various reports say that people who lost their homes to foreclosure are lining up to buy again, or getting ready to, having spent the prescribed time in renter purgatory. But it’s not a given that anyone who can buy again should rush back in.
Although a foreclosure is a black mark, many of those who had their homes taken by lenders a few years ago can borrow again fairly soon. The Federal Housing Administration requires a three-year waiting period before it allows an applicant to qualify for a new loan; the Veterans Administration requires two.
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For a new mortgage backed by Fannie Mae or Freddie Mac the wait can be as long as seven years. But it can be as short as two if the borrower avoided foreclosure with an alternative such as a short sale or deed in lieu of foreclosure. Making a large down payment can trim the wait too.
If you’re ready to borrow again, it’s worth shopping around, assuming your credit history has been pristine in the years since the foreclosure, short sale or deed-in-lieu.
Even if a lender will approve you, does it make sense to become a homeowner again?
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The disasters millions of homeowners suffered in recent years provide a reality check on homeownership. It should be clear now that owning a home is not the guaranteed path to prosperity many had thought. Though a nationwide collapse in home prices was unprecedented, dips in local markets come fairly frequently. And that’s all it takes to up-end your finances — a price drop in your neighborhood.
Over the long run, owning is generally better financially than renting, because with a fixed-rate loan your monthly principal and interest payment never rises. Renters are likely to face rent increases almost every year, and renters’ payments never end, as owners’ do if they stick with it until the mortgage is paid off. The owner builds equity that can be used to fund retirement years or be passed to heirs; renters don’t.
The traditional rule of thumb says that owning makes sense if you will have the mortgage for at least four or five years. That’s long enough for your home’s value to grow enough to offset the costs of buying and selling — things such as Realtor’s commission, transfer tax and legal fees. After the bad experience of the housing bust, when falling prices left millions of homeowners owing more than their home was worth, a break-even period of seven, eight or even 10 years seemed like a safer bet. Now that home prices are rising, the old four- to five-year rule may again make sense.
So don’t buy unless you intend to stay put at least that long, especially if you wouldn’t have enough accessible cash to make up the difference if things went wrong — your home couldn’t sell for enough to pay off the loan and cover other selling costs. The Mortgage Loan Calculator will show how much you would still owe four or five years down the road.
Of course, buying does not make sense if your job seems insecure or if your housing needs seem likely to change because of a marriage, divorce or expanding family.
Another way to minimize the risk of homeownership: Don’t spend more than you have to. A home is not generally a great investment, as prices rise on average at about the inflation rate or just a tad higher. Add the cost of mortgage interest, maintenance, property taxes and insurance and a home is a money loser. Buy the least expensive home that serves your needs and invest the savings in mutual funds or some other holding.
Finally, don’t get stampeded. Yes, home prices are rising, but in most of the country they’re not rising very fast. If this is not the ideal time to become a homeowner again, you’ll still find plenty of affordable homes in a year or two.
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- Federal Housing Administration