Why you should consider doing everything possible to AVOID foreclosure

October 3, 2009 · Posted in News For Homebuyers

Why you should consider doing everything possible to AVOID foreclosure
There’s lots of talk in the media about homeowners who are “underwater,” owing more on their mortgage than their home is now worth. Some choose to “walk away” from the home and allow the lender to foreclose. This may seem to make sense – until you realize that foreclosure has severe financial and emotional consequences that last for years. The truth is, with all the foreclosure prevention options now available, people should consider foreclosure only as a very last resort. Here’s what happens in a foreclosure:

1. You lose all the money you’ve invested in your home – the down payment, what you’ve paid back on the principal, what you’ve spent on repairs and improvements.

2. You could wind up with a tax bill. When a lender sells your home for less than what you owe on the mortgage, the difference is called “forgiven debt.” To the IRS, that’s taxable income. Congress passed a law to relieve foreclosed owners of this burden, but there are conditions. Check with a tax attorney or accountant.

3. The lender could sue you. In some states “forgiven debt” is considered a loss the lender can sue you for.

4. You could have trouble finding a new home. It can be hard to find cash for a rental deposit, which could be double the usual amount because landlords are hesitant to take tenants with Credit problems.

5. A foreclosure is reported to credit bureaus and stays in your file up to seven years. A bad credit rating means higher interest rates on loans and credit cards, making future borrowing difficult to impossible.

6. A long wait to buy again. Fannie Mae just increased the time from foreclosure completion to approval for another mortgage from four to five years. Extenuating circumstances, like a job loss, can cut this to three years, the same waiting period as FHA mortgages.

7. Employment problems. A foreclosure can hurt your chance of getting a job if it involves money. Credit checks are typically required for money-related jobs from cashiers to accountants.

8. The emotional impact of leaving a home. You usually wind up in a new neighborhood, with new schools for the children.

I hope this makes clear why the benefits of foreclosure prevention far outweigh the consequences of allowing a foreclosure to happen.