Dear Debt Adviser,
I just learned that I might be eligible for a Federal Housing Administration mortgage loan after my foreclosure in 2011. Do you think it's wise to re-enter the housing market right now?
You are correct. The Federal Housing Administration (FHA, not Fannie Mae) has shortened the waiting period to become eligible for a new mortgage after a foreclosure, short sale or bankruptcy from three years to 12 months. The hope is that this will spark a new wave of homebuying.
You may qualify for an FHA mortgage if you can prove that your foreclosure was caused by a job loss or reduction of income that was not in your control. You must also prove that your income has made a full recovery, and you must receive counseling from a Department of Housing and Urban Development-approved agency that focuses on homeownership. And FHA will be looking to see if you've repaired your credit.
This can be tough to do within a year. And even if you can meet those requirements, you should still ask yourself if you should take the plunge again. As the saying goes, "Those who fail to learn from history are doomed to repeat it!"
Before you give a mortgage another shot, I suggest you ask yourself the following questions.
- Do you have enough money saved up to make a down payment of at least 10 percent? FHA requires only a 3.5 percent down payment, but I believe you should be more invested in your property than that.
- Would you be able to make your mortgage payment for at least three months even if you lost your job the day after closing? The last thing you want is to be in a situation that causes you to default on another mortgage. If you don't have sufficient savings to make at least three mortgage payments, you may be taking too big of a risk with another mortgage.
- How are home prices trending in the area you want to live? Have they leveled off? Are they rising? Being underwater in your mortgage is something you want to avoid. Purchasing a home when prices are low is good as long as the property values have stabilized.
If you answered yes to all of these questions and you are shopping for a home that you can reasonably afford, then yes, it may be a good time to get back in the market. Your housing counselor will be better able to offer you specific recommendations for your particular situation.
One last thought on the aftermath of the housing crisis: Much of the burden for the money lost in foreclosures, short sales and bankruptcies during the crisis has become the burden of U.S. taxpayers. If you're lucky enough to be purchasing a home again after walking away from a mortgage, or shedding a portion of the debt, I think you should donate a portion of your new equity to a qualified charity when you sell.
Giving back a small portion of your future good fortune would be a nice way to balance the scales. Consider the good you could do with money you never really had.
Finally, if you want to learn more about the government's housing counseling program, you can download a handbook at the U.S. Department of Housing and Urban Development's website.
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