Foreclosure is something no one wants to face in life. And for those who faced it, may find it the toughest time of their life. It can be embarrassing and having long-lasting consequences. Also, it can be stressful as well. The process of foreclosure can be varied from nation to nation. But before we take a look at the consequences of foreclosure let’s understand what foreclosure is?
The process in which the lender can take possession of the property if the homeowner failed to meet mortgage payments is called foreclosure. It’s a legal process. It can also happen when a mortgagor fails to give a specific number of payments.
Here are some consequences of foreclosure;
Effects on Credits
It badly affects your credits and has a bad impression on credit as well. For those who have a good credit score, after foreclosure, it will be down by 100 scores or can be more. And for the person with an excellent foreclosure score, it will down by 160 or more. In simple words the higher your credit score, the lower it will be after a foreclosure.
It will take a long time to recover the credit score. May be 3 years or more. It can easily take 3 to 7 years to recover fully from foreclosure. With every late payment, your credit score will decrease. Well, most of the banks wait for 90 days before starting the process of foreclosure. The process is long, it can take months to complete.
Also, if you do not make payments before the completion of foreclosure, it will affect your credit. And have negative information on your credits for 7 years. Credit denials for loans and credit cards also occur after foreclosure.
Effects on Taxes
Most people have no idea about the tax consequences after foreclosure. Not everyone considers the tax consequences. If you are losing your home to foreclosure, you have to face the tax implication. According to IRS, if you do not give the borrowed amount of money, that money is considered as income. And it is taxable as well.
A mortgage occurs when a bank or lender lends money to a property owner in exchange for a pledge to repay the money. The money is not recorded as income on the owner’s tax return after they start repaying the loan. If, on the other hand, this obligation is cancelled, it must be reported as income for tax reasons.
Because there is no longer any commitment to repay the lender, the loan amount is considered income.
The tax repercussions kick in whenever the lender sells the property. The original loan was based on the property’s worth, but these valuations are constantly shifting. If the property is sold for less than it was worth when it was first purchased, and the bank is unable to recoup all of the money it lent.
When debts are dismissed through bankruptcy, such income is usually exempt from taxation. If a homeowner is declared insolvent, or if certain farm debts or non-recourse loans are involved, a cancelled debt tax may be imposed. Consulting a tax specialist for advice on your specific position and what you might expect is always the wisest and safest course of action.
Home After Foreclosure
If your foreclosure process is finalised, then your house owner can throw you out of his house legally. And it would be difficult to find a home with such a low credit score. Also, it would be difficult to find a home after foreclosure but not impossible. It will take time to buy a home after foreclosure and it’s quite challenging.
Most lenders require a credit score of 650 for giving loans, also a long waiting period. You can take an FHA loan after three years of completion of the foreclosure. And you can take a loan from Fannie Mae after the 5-year completion of the foreclosure. What you have to do is to work on increasing your credit score to get a loan.
You have to face a lot of problems during the period of foreclosure or even after it as well. It will disturb you emotionally and psychologically. One may feel quite helpless during this period of time as it’s not as easy as it sounds to everyone. Also, your children will face a lot of problems due to this.
They have to change the school the society or maybe the city. Also, you have to face society, relatives and colleagues. Also, you will find difficulty in finding a job with less credit score. No one would prefer to hire a person with less credit score. It will disturb you emotionally.
How Long It Takes
According to the U.S. Foreclosure Market Report from ATTOM Data Solutions, a property data provider, properties foreclosed in the third quarter of 2020 remained in the foreclosure process for an average of 830 days. That is a 21.1 per cent rise over the prior quarter’s average of 685 days in the foreclosure process, which was slightly lower than the previous quarter’s average of 841 days.
Each state has a different average number of days. In the third quarter of 2020, the states with the longest average number of days for homes foreclosed were;
- Hawaii is a state in the United States (1,741 days)
- New Jersey is a state in the United States (1,527 days)
- New York is a city in the United States (1,423 days)
During the same time period, the states with the shortest average times to foreclose were 180 days in Virginia and 208 days in Minnesota.
What to Do in Foreclosure?
In such a case, the first thing you should do is contact the lender and explain your situation. Tell him the truth about why you’re having trouble making your payments on time.
Describe your financial assets, liabilities, and costs, as well as any other debts you may also have. Do not give up, even if your position appears hopeless.
Foreclosure is challenging. You have to face these consequences during and after the process of foreclosure.
If you are concerned about your debt and are afraid of foreclosure, check with a local Housing Counselling Agency to see if they provide any programmes or services to help you avoid losing your house.