Say youâ€™ve lost your home to foreclosure. On top of decimated credit, youâ€™ve resigned yourself to the fact that you will probably never be able to finance a home purchase again.
Amazingly, that may not be the case. A small number of private investment firms are stepping in to fill the gap. These investors are lending to borrowers who cannot meet banks requirements, yet are ready to become homeowners again and can prove the ability to repay a loan.
Critics say these loans are dangerously similar to the subprime mortgages that fueled the housing boom and led to the devastating bust. The loans are often balloon loans, requiring the borrower to pay the balance after a term of 5 to 7 years or refinance. Two firms, Athas Capital Group of California and New Penn Financial are also making jumbo loans or loans that exceed $417,000.
These firms believe they are taking a smart, calculated risk. Higher down payments, around 40% on average are necessary. While the investors are flexible when it comes to documentation, willing to accept pay stubs or bank statements rather than tax returns, they still demand proof that the borrower can repay. The loans also carry stiff interest rates, as much as 13% in some cases or roughly twice the cost for a traditional mortgage. This can be a lifesaver for those who are self-employed or were unemployed during the recession but are now returning to the workforce.
This new sector of private investors could be on the verge of a boom as banks have been slow to extend to borrowers with damaged credit. Also banks are beholden to shareholders and heavily monitored by regulators.
There is an old say in finance. Bankruptcy can affect your credit for 7 to 10 years but foreclosure is forever. But for borrowers who want to own their own piece of the rock once again, private investors could offer a chance to recover what once seemed an irreversible financial loss.