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Consequences of Foreclosures

Consequences of Foreclosures

A foreclosure can be stressful and embarrassing because you lose the home for good after failing to meet the terms of the mortgage loan. You get evicted from the home and must look for a new one. However, it is possible to avoid all the consequences of foreclosure even after receiving a foreclosure notice. You can actually sell the property facing foreclosure before it is auctioned and avoid the below consequences.

1. DAMAGE TO YOUR CREDIT RATING

A foreclosure signifies an inability to pay a mortgage loan. This means it dents your credit score and impairs the ability to get more credit and another mortgage in the future. A foreclosure will reduce the credit score by as much as 160 points if you had an excellent score before the foreclosure. It reduces the credit score by 100 points if your score was rated as good before the foreclosure. Therefore, the higher the credit scores, the worse the consequences of foreclosure.

Credit rating damage
Credit rating damage

Worst of all, it takes about three years or more to rebuild the score to this level after a foreclosure. This requires making timely payments during the period. If your credit did not sound aside from the foreclosure issues, it can take seven years to rebuild to that level.

Damage to your credit score starts to happen any time 30 days after defaulting a payment. It is when the mortgage lender reports to the credit bureaus that you did not meet the obligation. Second, all late repayments will impact the score negatively. Foreclosures usually start when you miss at least four payments consecutively. However, banks usually start the foreclosure process 90 days after a defaulted payment.

A foreclosure takes several months to complete. Thus, it is possible to resume payments to normalcy and rebuild your credit score before it is too late. Many homeowners cannot wait for a damaged credit score and therefore look for alternatives to foreclosure. Contacting your lender to reschedule repayments is one of the best ways of averting a foreclosure crisis. Therefore, you need not wait for foreclosure if changes in your income and finances are forcing you to miss mortgage repayments.

2. FINANCIAL INSECURITY AND ECONOMIC HARDSHIPS

A poor credit rating after foreclosure means you cannot access more credit. It also might affect your access to insurance. Foreclosures can also affect your employability in the future since some employers will consider your credit rating before hiring. This further dents your financial stability and chances of recovering from your low credit score.

Foreclosures also reduce your net worth as a direct consequence. Even if you would access some loans and credit, the amount is now lower due to the reduction in net worth. Further, even if you had money to rent another house, you will incur expenses in house searches and relocation.

financial insecurity
Model home on mouse trap with worried businessman sitting on chair representing increasing real estate rates

Economic pressures may result in the reduction of the value of your home while exposing you to foreclosure. Some homeowners prefer voluntary foreclosure when they deem the value of the property to have decreased more than the value of the repayments. This also happens in cases of a bad home investment where you bought the house at a price much higher than the actual value of the house. If your house has a value higher than the loan, it makes sense to sell it before it is auctioned. Another good alternative is to find other sources of income to enable you to resume the repayments.

3. DISPLACEMENT AND DISRUPTION AS YOU MOVE OUT

The foreclosure process requires you to relocate. You must move out your belongings from the home. Some people will have nowhere to go because the same financial reasons for which they failed to meet the mortgage payments still exist. It can be hard if you do not have money to rent a house. Usually, many homeowners facing foreclosures still have income and resources to afford them a rented house.

However, even if you can afford a rented house, you will still need to make major financial and lifestyle adjustments if facing a foreclosure. For instance, you will end up spending more money on rent in the long run than owning a house. Besides, you now have to pay rent every month unlike the case when you had your own home. This will require making major adjustments to your finances if for instance you do not have a monthly income or are unemployed. A few people affected by mortgage foreclosures move to live with their family and friends. Others go to emergency shelters and live on the streets.

Foreclosures usually result in homeowners moving from their preferred location where they lived to other places. Financial circumstances may force families to move to places they do not like. This may not always be comfortable for kids. For instance, they would have to change schools and friends. This can also result in additional expenses if you must pay to take kids to the new school. It can also lead to mental stress and even depression due to family disruptions.

Nevertheless, the law requires the mortgage lender to give the homeowner some time to make repayment or other arrangements even after initiating a foreclosure. Most mortgage lenders will give the homeowner time to recover by either selling the property or sourcing money from elsewhere even if there was no legal provision for it. This is because banks do not just lend money to anyone. Having made their assessments before awarding the loan, they understand you are a valuable client only that the financial situation may have changed. Thus banks are more than willing to reschedule repayments or reduce repayment amounts without even reporting to credit bureaus.

That said, homeowners can sell a home under foreclosure to avert the consequences of foreclosure. They can then spend some money to fix their bad credit by repaying the lender. The extra amount can be spent to rent a house or buy a new home. It depends on the present value of your property and the terms of the mortgage loans.

Read more:
Can You Sell a House in Probate?

 

 

4. LOSS OF ITEMS AND VALUABLES

Most homeowners have to sell valuable equipment and items to downsize the lifestyle after a foreclosure. This also happens when you rent a smaller space than your former house. You may now have no room to keep bulky furniture and electronic equipment. You may also be forced to sell the car and other items to raise money for renting a new home. In most cases, the selling price is way below the actual value of the item. Second, you want to sell these items quickly and hence must lower the price.

Homeowners are unable to sell the items in some cases after foreclosure because they must move out fast. They may end up giving the items to family members and friends. Once this is done, it takes time to raise money to buy more items and equipment. This is considering your current bad financial status after a foreclosure.

Thus a foreclosure can force an unwanted change to your lifestyle and thus it is necessary to avert the consequences at all costs.

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