Tight credit keeps distressed buyers from purchasing

Lauren Bunting

(May 15, 2015) Real estate is making a comeback, the sales statistics confirm this as a fact — but a recent study released by the National Association of Realtors (NAR) stated that only one in four former homeowners who lost property during the housing crash will soon become buyers again as tight credit keeps many out of the U.S. real estate market.

The study supplied statistics that of the 9.3 million owners who went through foreclosure or were forced to sell at a loss since early 2007, about 950,000 already have bought again, and 1.5 million more are predicted to make a purchase in the next five years. NAR also reported that in Jan. 2015, the average FICO credit score on a closed loan was 731, but the average denied FICO score was 681.

Lawrence Yun, NAR chief economist, said there were two waves of defaults during the housing crisis: from subprime and then prime borrowers. “While loose lending standards in the mid-2000’s led to the rise in subprime buyers who ultimately became distressed owners, falling home prices and rising unemployment resulted in a large share of prime borrowers also defaulting or going through a short sale,” he said. “Now fueled by a gradually improving economy and the strong rebound in home prices, some of these former distressed owners have returned to the market, and more will likely become eligible in coming years.”

Several important factors were taken into account in NAR’s study, including the time necessary to repair a distressed seller’s credit, whether the distressed seller’s credit profile (at the time of purchase) fell below historic standards, if it met sound underwriting standards and whether they would meet credit overlays in the current stringent environment.

Other statistics from the Census Bureau show that U.S. homeownership has recently fallen to just below 64 percent, which is a two-decade low. While renter households have increased by 8 million over the past 10 years. This decrease in homeownership, and increase in renter households is driving rental rates upwards at an alarming pace. And, in many areas of our local market, you can buy a home for less than you would pay in rent. But, tight credit and lending standards will continue to limit the amount of people who are able to make the transition to homeownership.

Lauren Bunting is a licensed realtor with Bunting Realty, Inc. serving Worcester and Wicomico counties.

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