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What is Foreclosure?
You'll most likely take a mortgage loan to buy a home. If this is the case, the lender expects you to hold your side of the bargain by making timely monthly payments until the mortgage is over. Things can, however, take a wrong turn if you default on payments or violate the terms of the mortgage loan. The lender can take back the property and sell it or auction it to recover the remaining mortgage debt. This is basically what's known as foreclosure.
Consequences of Foreclosure
As you can see, foreclosure is stressful, embarrassing, and can have long-lasting consequences in various parts of your life. Here are some of the main consequences of foreclosure.
Losing Your Home
The most obvious consequence of foreclosure is the possibility of finding yourself without a place to call home for you and your loved ones. You can find yourself on the streets without a home or have to rely on friends and relatives for shelter for the coming months or even years! While you can find an apartment to rent if you get your finances in order, most people, unfortunately, end up homeless after foreclosure.
Emotional Stress and Uncertainty
In addition to the uncertainty that comes with not knowing exactly when you'll be forced to leave your home, going through foreclosure is always emotionally stressful. While foreclosure doesn't mean that you're irresponsible or a failure, it could leave you in a situation where you have to convince your spouse or loved ones that it isn't your fault. In most cases, you'll be socially stigmatized as some of your friends or close relatives will abandon you and it can be a seriously stressful thing to deal with.
That's not all; the emotional toll associated with foreclosure may be compounded by how it affects your private life. For example, you may have to move to another state and this would mean that your children may have to change school districts. You may also end up moving from a spacious home to a smaller and congested apartment, which can be detrimental to the normal life that you're used to.
According to recent studies, foreclosures do have significant psychological effects on both individuals and families. They're embarrassing, stressful, exhausting, and intimidating, so it's always recommended that you seek appropriate psychological help. This is because a lack of self-esteem and self-worth are generally associated with people that have lost their homes to foreclosures.
Your Credit Rating will be Destroyed
Having a foreclosure will be reported on your credit score and it will likely ruin your credit rating for many years. While defaults on a mortgage payment can hit your credit score anywhere from 70 to 135 points, a foreclosure will most likely take between 85 and 160 points from your credit points and this is a significant amount!
So even if you had a perfect credit rating before the foreclosure, you'll be knocked down with either a fair or poor credit assessment. Keep in mind that such a significant credit knockdown will not only affect your prospect of getting credit for at least the next seven years. Creditors may also increase the interest rates that you pay on your current credit accounts, let alone the credit denials for loans and credit cards that will soon follow.
You May Have Problems Finding a New Home
You'll, of course, have to find a new place to live when you've been evicted from your home as a result of a foreclosure. Sadly, finding a new place can become extremely difficult with a lower credit score. Most landlords use credit scores to assess their tenants and will become wary of someone with previous eviction or foreclosure on their credit report.
And even if you find a landlord that's willing to accommodate you, he may require you to pay an inflated security deposit to get into the home.
Negative Financial Spirals
Given that foreclosure may have a huge dent on your credit report; this process can leave you in a negative financial spiral that can be extremely difficult to get out of. Your situation will become worse if there's a deficiency after the foreclosure sale as the lender will most likely sue you for the balance.
You may also have lots of difficulties finding a job as many employers may deem you irresponsible. Needless to say, this will leave you in a pretty bad situation as you won't be able to pay your bills, and life will never be normal. In short, some employers require a perfect credit rating, and going through a foreclosure can even give them reasons to fire you.
Foreclosure May Negatively Impact Your Community
The spiral effects of foreclosure can also have serious negative impacts on your community. For instance, a single foreclosure can leave your local or county government facing more than $30,000 in trash removal, inspection, and unpaid utilities. There can also be potential demolition costs that the agency might have to deal with. Again, property values generally go down in an area where there are lots of foreclosed properties and this can have negative financial and social impacts in the community.
The Challenge of Buying a New Home
Buying a new home after going through the devastating foreclosure process can be a real challenge. Most lenders will require a credit score of not less than 620 points, as well as a waiting period before your loan application is even considered. In most cases, you'll have to wait between 5 and 7 years for your loan application to be considered after foreclosure. It will take some time and effort but it's still possible to buy a home after a foreclosure.
While we all seem to know the credit score consequences of foreclosure, most of us aren't aware that there are tax consequences that a foreclosure can bring. Foreclosures generally come with property title transfers and subsequent tax assessments.
According to the IRS, any money that's borrowed and not paid back is considered an income and is taxable. Simply put, a mortgage is an agreement between the lender and the homeowner in which the lender lends money to the homeowner with the promise to be returned at a later date. If the homeowner starts paying back the mortgage, the money isn't considered an income. However, foreclosure can quickly turn into a forgiven debt and you may be required to pay tax.
Here's a perfect example. If you owe $400,000 on your house and it sells for $300,000 in foreclosure, the lender can either choose to sue you for the remaining $100,000 or forgive the debt. If the latter is the case, the IRS expects you to report the amount on Form 1099-C, Cancellation of Debt and is considered an income. You should, therefore, pay capital gains and income tax applicable.
Your only reprieve maybe if the debt is discharged through bankruptcy, insolvency, or if you qualify for the Mortgage Forgiveness Debt Relief Act. As such, it's always recommended that you contact a tax professional and get help with your specific situation and the best way to move forward.
The Importance of Understanding Foreclosure Consequences
Whether you're struggling financially or unable to pay your mortgage due to unavoidable or unforeseen circumstances, it's important to understand that a foreclosure isn't the best move. Well, foreclosure comes with some far-reaching consequences that may affect most parts of your life now and in the future. You'll not only lose your home and have a serious dent on your credit report but you may also face the prospects of having to pay more taxes, fail to find a job, fail to find a new home, and worst still, have to deal with serious emotional and psychological stresses.
There's Always Hope
Our partners fully understand that a foreclosure can be a difficult thing to experience. We always believe that any homeowner should not go through foreclosure as its impacts can be devastating. As such, it's in our honest interest to help homeowners find the best programs, assistance, and solutions that can save them from losing their homes and this means avoiding foreclosure.
If you really want to speak to a certified professional in matters foreclosure, you've come to the right place and we'd really love to help. The best thing to do is to take action before foreclosure and we are here to help you make things right, avoid losing your home, and get you back on the right track.
All you have to do is contact (214) 441-7706 and our partners will help you through these trying times. Contact us today, fill out the form, and we'll organize a free consultation immediately.