Turning a new credit page
I was cleaning out the closet in my guest room recently – you know the one that becomes the repository for all the stuff you don’t really need, but don’t really want to throw away. Interestingly I came across a newspaper from 2003 and naturally started reading the real estate ads. Incredibly, the listing prices on the Island properties were not much different than comparable properties today. Some were 1 or 2 percent lower and some were right on, but the exercise got me thinking about what happened to all the homeowners who lost their homes prior to 2008.
As overextended homeowners started losing their homes to foreclosure, the effect on their credit rating impacted not just their ability to get a mortgage, but also car loans and credit cards. Many people had to learn to live without debt, paying for everything with cash.
It was reported by Fair Isaac Corp., that developed the FICO credit scores that most lenders use today, that there were over 900,000 consumers whose credit reports showed they had a foreclosure proceeding on their homes between October 2007 and October 2008. Of these homeowners, about 260,000 showed no evidence of the foreclosure on their credit report as of this past October. This indicates that the negative credit event of having a foreclosure starts to fade after a period of about seven years.
As this seven-year period approaches, borrowers can start to qualify for new home loans, new car loans and credit cards, all at lower interest rates. This assumes that their credit score was not further impacted by late payments on credit cards and auto loans.
That said, getting a loan at all and for a good interest rate can still be daunting for many people who have been through a foreclosure. Not all lenders welcome these borrowers and have placed tough credit requirements on consumers, frequently omitting those with a foreclosure in their past.
In fact, according to the National Association of Realtors, less than one-third of homeowners who lost their homes to foreclosure in the past 10 years are likely to become homeowners again. Between 2006 and 2014 more than 9.3 million homeowners went through a foreclosure, surrendered their residence to a lender or sold their home via a distressed sale.
Some of the big banks like Wells Fargo and Sun Trust are starting to ease credit regulations slightly, but they are still looking for a 620 to 660 credit score before approving applicants. FICO credit scores range from 300 to 850 and can quickly be improved once the foreclosure is removed from their credit reports after seven years.
However, many individuals will never qualify for financing again because they are unlikely to improve their credit scores enough to qualify for a mortgage. Others just feel they have been burned too badly to chance it again. All the same, there is optimism in the real estate market anticipating a large new pool of homeowners who are coming out of the shadow of foreclosure. This could really help boost the slow economy as demand for mortgages and homeownership starts to filter its way through the overall economy.
I’m still not sure why this particular 2003 newspaper was saved. Maybe it was meant for me to find it 12 years later. Never-the-less, it did serve its purpose, making it valuable if for no other reason than to remind us that real estate is one big cycle that moves up and down in the larger economy.
