There has been a recent wealth of reports suggesting rising interest rates on mortgages, resulting in a fall in volume. According to the Mortgage Bankers Association, the Market Composite Index, a metric of the volume of mortgage loan applications, saw a drop a decrease of purchases by 5% and refinance by 8%. This decrease in the volume of applications means that lenders will be looking to broaden opportunities for business. With lenders looking for more business, the market could potentially see an increase in the number of subprime borrowers. The Mortgage Credit Availability Index, also put out by the Mortgage Bankers Association, increased by 0.7% to 111.5 last month, an indication mortgage credit is loosening.
This could mean that subprime borrowers, including those looking to purchase after a foreclosure or short sale, may comprise a larger portion of loan application volume moving forward. The options most readily available to borrowers in such circumstances are FHA and VA loans. In particular, the FHA established the “Back to Work” Program back in August, by where a borrower after foreclosure or short sale can apply for a loan 12 months after foreclosure or short sale, with a demonstration of “economic hardship”. Economic hardship is defined as a 20% loss in household income for a period of 6 months or longer leading up to foreclosure or short sale. In the absence of such a hardship, the FHA offers a standard loan that incurs a 36 month waiting period in order to qualify.
Amidst assertions that the mortgage insurance tethered to FHA is increasing, these loans are still one of the most viable options for subprime borrowers. Down payment on these loans is in the .5%-3.5% range, and APR is still in the mid 3%- mid 4% range.
A borrower with VA eligibility can purchase 24 months after a foreclosure or short sale. VA loans do not require any down payment. VA loans have a funding fee that can get financed into the loan.
It is still early to determine whether this loosening in credit will equate to a resurgence of subprime borrowers in the market in the long run, but the immediate signs indicate it may be a possibility. For those subprime borrowers seeking to return to home ownership after a foreclosure or short sale, there are viable options available to you whether the trend continues or not.
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