For many homeowners, that monthly mortgage payment is a constant source of stress. And when the economy slows or you lose your job, it’s easy to get behind on those payments and face the prospect of losing your home to foreclosure. Whether you’re just barely making do, trying to catch up, or already looking for a new place to live, it’s important to understand foreclosure consequences.
What Is Foreclosure?
To buy your home, you probably had to take out a loan called a mortgage. This means that until you pay off that loan, your lender has certain interests in the property. So, if you fall behind on your mortgage payments (default), the bank or other mortgage holder can take back the property and sell it to pay off the remaining mortgage debt. This is the process of foreclosure.
Some foreclosures are done through judicial sale where the court supervises the process. Many states also allow for foreclosure by power of sale where the lender sells the home without court supervision. In either case, the proceeds of the sale are used to first pay off the mortgage, and then other lien holders, with leftover proceeds – if any – paid to you, the homeowner. If you owe more on your mortgage than your house is actually worth, your lender might pursue a deficiency judgment against you to recover the additional amount. In that case, you’ve lost your home and you still owe more money.
Will Foreclosure Affect My Credit Score?
The short answer is yes. One of the most significant foreclosure consequences is the hit your credit score takes after the process is over. When financial institutions are deciding if they should lend you money, they evaluate whether or not you’ll be able to pay them back. Having a foreclosure in your past raises a red flag that because you couldn’t pay your bills in the past, you might have difficulty doing so in the future.
As a result, a foreclosure in your credit report lowers your credit score and can make it difficult to get new loans at the best interest rates. It can even make it more difficult to find a job or a rental property since many employers and landlords use credit reports as one way to assess your reliability. On the upside, however, your foreclosure will disappear from your report after seven years, and you can rebuild your credit by working on your debt and paying your bills on time.
Do Foreclosure Consequences Include Higher Taxes?
Many people are unaware that if a debt they owe is cancelled, the IRS considers it income for tax purposes. So, if you owe $300,000 on your house and it sells for $200,000 in foreclosure, but the bank discharges the remaining $100,000 debt, you have to report that $100,000 as income on your taxes. However, you may be able to exclude this income if you’re insolvent, have filed for bankruptcy, or if you qualify for the Mortgage Forgiveness Debt Relief Act.
Can I Get My House Back After Foreclosure?
If you have the money, some states will allow you to regain ownership of your foreclosed home in a process known as “statutory redemption.” Under this rule, you can reclaim your home if you are able to pay what the house sold for in the foreclosure sale. You may also have to cover interest on that amount, payable to the person who bought the house when it was foreclosed on. Depending on your state, you have anywhere from 30 days to two years to attempt to reclaim your property under statutory redemption.
Be Prepared by Understanding Foreclosure Consequences
When you’re struggling financially and having trouble with your mortgage, foreclosure is by no means a quick fix or a fresh start. Not only do you lose your home, but it hurts your credit score, can make it tough to find work or new housing, and can even result in a hefty tax bill. In some cases, it may be necessary, but you shouldn’t head in that direction without understanding all of the major foreclosure consequences coming your way. Contact a foreclosure attorney to learn how a foreclosure might affect you and ways to avoid losing your home.