Out of the Shadows

by Doug Love

A “shadow inventory” of new buyers is infiltrating the real estate market.

This “shadow inventory” of buyers is made up of people who lost their homes through distress sales, such as foreclosures or short sales, and are ready to jump back into homeownership. These buyers have worked hard to get back on their real estate feet, but they are also lucky. New loan programs have sprung up recently, allowing them to qualify to buy again, despite the heavy hit they took on their credit when they lost their homes.

Traditionally, if you lost your home through foreclosure your credit would suffer enough damage that you couldn’t qualify for a real estate loan for up to seven years afterward. A short sale would set you back at least three years. If you also declared bankruptcy, your credit damage was that much worse.

Now lenders are giving new consideration to distress-related credit damage. The hard times in the Great Recession were so bad, and so many people lost their jobs and their homes, that lenders have created new loan programs to accelerate their re-entry into the market.

FHA launched the “Back-to-Work-Extenuating Circumstances” loan program which cuts the waiting period for loan-qualifying down to one year after a foreclosure, a bankruptcy or a short sale. The borrower has to prove that they suffered a 20 per cent drop in income for six consecutive months due to job loss or another economic event, and they must have 12 months of on-time rent payments.

Sean and Anita Burkes recently bought a new home through the FHA Back-to-Work-Extenuating Circumstances loan program.

“It’s a great program,” said Anita, “but it’s not easy.” She made hair-pulling motions as she described the amount of paperwork involved in getting the loan. Then she held her hand two feet above the table top. “A stack this high,” she said.

Sean laughed. “The only worse paperwork nightmare I’ve seen was our short sale when we lost our house a year and a half ago,” he said. He held his hand as high as he could reach above the table. “A stack this high,” he said.

“We’re so thankful, though,” said Anita. “We were really down and out. But Sean got a new job, and now we own our new home. It feels good that a lender will take a chance on us again.”

Sean nodded. “And it feels good to come out of the shadows.”