As if losing a house on the court steps wasn't enough, some former homeowners may find themselves turned away by apartment owners spooked by the foreclosure history on their credit reports.
One Virginia couple ended up living in a hotel after their foreclosure, according to Trish Lynch, a trainer and former credit counselor at ClearPoint Financial Solutions, who worked with them.
"No one would rent to them. And the hotel is costing them $3,000 a month to stay there," she said.
Lynch recommended they try to rent from a private owner or individual who might be more lenient on credit checks, but who could also ask for higher rents to cover their risk. So far, the couple's still stuck at the hotel.
As foreclosures rise across the country and skyrocket in economically depressed areas and once-hot housing markets, more apartment owners are seeing an increase in the number of rental applicants with derogatory mortgage histories. That includes foreclosures, short sales — when a house is sold for less than the amount owed on the mortgage — and deed-in-lieu of foreclosure, when a homeowner gives up a house to the lender to end the foreclosure process.
Many of these would-be renters flood the so-called shadow market of investor-owned homes and condos, which make up almost half of the rental stock and are not tracked by the apartment industry. But some former homeowners are making their way to the traditional rental market, causing concern for some landlords.
When Jane Garvey, president of the Illinois Rental Property Owners Association, informally surveyed the 500 members of her association, the landlords expressed some discomfort with renting to people with foreclosure issues.
"They need to know they're going to get paid," she said. "As a group, people seemed more reluctant to accept people going through a short sale. They look at it as signing a contract but not going through with it."
Some in the apartment industry have been trying to slice and dice the applicant pool to identify who could make good renters and add to occupancy levels and the rental base, said Mark Fogelman, president of Memphis, Tenn.-based Fogelman Management Group, which owns and manages 18,000 rental units in the Southeast, Midwest and Southwest.
"For us, that's too subjective and sets a risky proposition," he said. "We have not successfully been able to accept many applicants with defaulting mortgages primarily because they tend to have other credit issues."
Between 5 percent and 7 percent of rental applicants are 90 days or more past due on a mortgage or in foreclosure, said Jay Harris, vice president of business services at renter screening company First Advantage SafeRent Inc. About two-thirds of those with a derogatory mortgage history qualify to rent.
The remaining third usually have other credit problems such as overextension on existing credit lines, public records related to collections, among others.
A study last year by Lakewood, Colo.-based First Advantage found applicants with a foreclosure had more than four times as many lines of credit over 90 days delinquent compared to applicants without a foreclosure. They also had three times more open or closed unpaid credit lines.
"These are not the same people who left to buy a home," Nevel DeHart, First Advantage's executive vice president, wrote in an article presenting the survey results. "They return to the rental market with significantly increased risk exposure associated with their ability to pay future rental obligations."
And unlike in a bankruptcy, he noted, a consumer still has to pay credit card and other debt obligations after a foreclosure, short sale or deed-in-lieu, which could further compromise their financial stability.
Some landlords may conditionally accept renters with foreclosures in their past. They may ask for an extra month's rent up front, a larger security deposit or a co-signer.
Donn Schaefer, president of the Metro East Landlords Association in Collinsville, Ill., is specifically seeking out displaced homeowners for his rentals. His company, Homesellers Solutions Inc., buys, sells and rents single-family homes and duplexes.
"Bad things happen to good people all the time. They need to have a place to live and sometimes people learn from their mistakes," he said.
"They make great tenants too," he continued. "They know about pride of ownership. They know about taking care of a house."
To ensure that they have shelter after a possible foreclosure, Lynch advises her clients to prepare for the worst.
Some lenders and loan servicers are offering money to struggling homeowners for their properties, dubbed a cash-for-keys exchange, to avoid the foreclosure process. Lynch recommends some homeowners use the cash toward a security deposit at a rental.
Lynch also suggests that homeowners who are facing foreclosure start looking for a rental before the foreclosure process is completed — since lenders can't report foreclosures to credit reporting bureaus until the procedure is finished.
"You want to look for the rental before the foreclosure hits your credit report," she said. "Because after that, it becomes much harder to find a rental."