Simply put, foreclosure is a process that lenders use to take property from borrowers. By taking legal action against a borrower who has stopped making payments, lenders can use foreclosure as an attempt to get their money back.
For a borrower, an obvious problem about going through foreclosure is the fact that you will be forced out of your home. You will need to find another place to live, and the process is extremely stressful for you and your family.
Foreclosure can also be expensive for a borrower. As you stop making payments, your lender can charge penalties and legal fees; borrowers often pay foreclosure-related legal fees out of pocket. If you can’t afford to pay those fees right away, the amount may be added to the debt you owe to the lender, and you may still owe money after your home is sold if the proceeds are insufficient.
How Foreclosure Affects Your Credit
You may be wondering what happens to your credit after a foreclosure, already knowing a foreclosure will hurt your credit score. To the degree a foreclosure affects your score can vary, but any late payments will show up on your credit report. In addition, if your home does go through foreclosure, an entry will be made in the section of your credit report that covers legal actions.
The foreclosure and late payment record can remain on your credit report for up to seven years, but that doesn’t mean that you will keep you from getting a loan during that timeframe. As soon as your financial situation improves, you can quickly improve your credit by paying other bills on time. Many people find that after as few as two years of keeping balanced finances, they can qualify for a new loan.
After going through a foreclosure, it is likely that you will need a large down payment when purchasing your next home. Your interest rate is also likely to be higher. Additionally, government programs like Fannie Mae and Freddie Mac are unavailable to people who have had a home foreclosed within the past two years.
The Tax Consequences of Foreclosure
One thing many people don’t realize is that there is often a tax penalty that comes with foreclosure. If the house sells for less than the amount owed to the bank, the rest of the loan balance is considered “forgiven.”
However, the IRS looks at this as income, as it is considered the same as a loan you would have had to pay back but are getting out of. As a result, you may be taxed on the difference between the amount owed and the amount the house sold for.
It is a good idea to talk to an accountant or tax lawyer about the possible tax consequences before you allow your home to foreclose.
How the Foreclosure Process Works
A foreclosure process can begin once a homeowner fails to pay their mortgage after just one month. Your mortgage lender will likely alert you via a phone call or letter presenting an official notice of default with details about the amount of money you owe and how you can submit your late payment.
At this point, you’ll generally have two choices: you can find a way to cover your missing payments, or you can try to get your lender to agree to a short sale. A short sale allows you to sell your own home at a lower price that doesn’t have to cover the whole loan amount. The bank will get some of their money and you will be done with the problem.
If a second month goes by and you’ve done nothing to alleviate the situation, you may receive more calls from your lender. After a third month of not making your mortgage payments, your lender may slap you with a notice of acceleration that gives you 30 days to get your payments in order.
Are you in danger of a foreclosure? Get help with a NAEBA agent today!
If you believe that your home may be in danger of foreclosure, a NAEBA realtor can help. Maybe your lender will be willing to negotiate and agree to a new payment plan that works for you. A certified buyer agent can help prepare you to speak with your lender’s lawyer and reach a solution. Check the list of NAEBA agents in your area today.