Have missed mortgage payments and thoughts of possibly losing your home to Foreclosure or Sheriff Sale been keeping you up at night? It’s not secret that the 2020 and parts of 2021 have been some of the most challenging and unpredictable time in U.S. history. For the entire country and many homeowners. Thankfully the mortgage forbearance has allowed people to stay in their homes while dealing with some of the financial hardships caused by COVID. However, not everyone will be able to recover. As of right now the mortgage forbearance is schedule to end June 30, 2021. If you’d like to keep your property once the mortgage forbearance period comes to an end we have created a list of FREE options you can take advantage of today by working with your lender.
If you’ve given some of those options a try and feel like walking away from your property is the only choice you have left you should consider the reality of what your life could look like after foreclosure. This article isn’t meant to scare you by any means. It’s merely meant to educate and ensure you make the most appropriate decision for you and your life moving forward. Even though the forbearance period is not set to end for a few more months you’re probably already seeing properties in your neighborhood being vacated, notices posted on doors from lenders, Sheriff Sale lists growing in size, and properties showing up on Zillow’s pre-foreclosure/foreclosure list. Believe it or not we have property owners experiencing such reach out to us frequently. More times than none the most common response we hear is “I’ll just let the bank foreclose on me and I’ll walk away” That may seem like the most appropriate decision in that moment but the reality is there are some negative consequences that come with such decision.
Consequences Of Foreclosure
- Finding A New Home
- Credit Impacts
- Purchasing A New Residence
- Giving Potential Employer An Explanation
- Tax Consequences
Finding A New Home
The immediate problem is obvious: where and how to find a new place to live. Lack of cash for a rental deposit is probably the biggest barrier to foreclosed owners getting re-established on their own. Foreclosures are strong evidence that you failed to fulfill a financial obligation, and that scares landlords. In the immediate aftermath of foreclosure, it may be significantly more difficult to receive approval on your rental application from a landlord or rental management group will pull your credit file. On a positive note if you come across a vacant rental property owned by a motivated landlord to fill it he may consider to give you a chance at becoming a tenant. It’s imperative you be honest when he/she pulls your credit and asks about your recent foreclosure.
Once a home is lost to foreclosure, you could see your credit score could drop dramatically. According to FICO, for borrowers with a good credit score, a foreclosure can drop your score by 100 points or more. If your credit score is excellent, a foreclosure could reduce your score by as much as 160 points. In other words, the higher your credit score the more impact a foreclosure will have. Usually it will take three years or more of on-time payments to restore the credit score. If the foreclosure is an isolated event and the borrower’s credit is otherwise sound, consumers may be able to recover more quickly. It can take anywhere from three to seven years to fully recover. A low credit score due to foreclosure can result in expensive interest rates and limited credit, making financial recovery difficult.
Your mortgage lender will typically report any payment that is 30 days later or more to the credit bureaus. This means that before the foreclosure process ever begins, your credit will be negatively impacted by each late payment. Most banks wait at least 90 days after failure to make payment to begin foreclosure proceedings. The process can often take several months or more to be completed. It is realistic that if you have not made payments, by the time a foreclosure is completed, your credit score could be reflecting at least six months of missed payments. This can have a significant impact on your credit.
Purchasing A New Residence
When you want to buy a new home after dealing with a foreclosure, there is generally a mandatory waiting period before you can get approved for a mortgage. The length of time required by Fannie Mae for a conventional mortgage is seven years. But you may be able to get a new mortgage sooner than that, depending on your circumstances and the type of mortgage you want.
Fannie Mae guidelines allow a shortened waiting period of just three years, provided you can document that the foreclosure was due to extenuating circumstances — meaning events that were beyond your control and not likely to happen again. Examples include a sudden job loss, large medical bills or a death in the family resulting in loss of income. With the three-year waiting period, there are more stringent requirements for getting a mortgage, including a larger down payment. However, if you’re buying a vacation home or rental property, the waiting period remains seven years, regardless of extenuating circumstances.
An FHA loan may be a better option for obtaining a mortgage after a foreclosure. The minimum time between the completion of foreclosure until when you can be approved for a FHA loan is three years. If you can document extenuating circumstances that were beyond your control, you may be able to request an even shorter waiting period for an FHA loan. Still, FHA borrowers will have to show that they’ve been practicing good bill-paying habits since the foreclosure. There is a surprising silver lining for homeowners who have gone through having mortgage debt discharged through bankruptcy. The waiting period for a new loan after such a process is actually shorter than with a foreclosure. Fannie Mae guidelines allow mortgage lenders to approve new mortgages after a waiting period of just four years (or two, with extenuating circumstances), rather than seven years.
Giving A Potential Employer An Explanation
If you lose your job as well as your home, your new job hunt shouldn’t be hindered by the subject of your foreclosure coming up in job interviews — unless you’re applying for a job in which you handle money or are involved with finances. There are rules that employers must follow, such as notifying the applicant of the credit check.
Tax Consequences After Foreclosure
While it’s common to hear about the credit consequences of foreclosure, not everyone considers the tax consequences. A foreclosure brings about a property title transfer and subsequent tax assessment. Most property owners do not realize that by losing their home to foreclosure, there are likely going to be tax implications.
Any time debt is forgiven; it is considered a taxable event. The IRS states that any borrowed money that is not paid back is considered as income and is taxable. A mortgage involves the bank or lender granting funds to the owner in return for a promise to pay the funds back. When the owner begins repaying the money, this money is not claimed as income on their tax return. If, however, this debt amount is canceled or forgiven, it will have to be included as income for tax purposes. The loan amount is considered income because there is no longer an obligation to repay the lender for the same.
Once the property is sold by the lender, the tax consequences come in. The original loan was based on the value of the property, but these values keep changing. If the property is sold for less than it was originally worth, and the bank is unable to recover all the money it had lent, the balance is reported to the property owner and the IRS on a Form 1099-C, Cancellation of Debt. This amount is considered as income and must be reported on the homeowner’s income tax form leading to capital gains and income tax applicable.
Typically, the only instance where such income is not taxable is when debts are discharged through bankruptcy. Canceled debt tax may apply if the homeowner is labeled insolvent or with reference to certain farm debts and non-recourse loans. It’s always the wisest and safest course of action to consult a tax professional to advise on your specific situation and what you can expect.
What Should I Do Next?
At the end of the day the best option for you depends on your current finances, employment status, and ability to resume mortgage payments. If you feel like you’ve exhausted all of the FREE options we’ve shared in past articles then you should consider selling your property. Walking away may seem like the only choice you have left but you should consider the long term ramifications that come with such a decision.
We’ve helped many homeowners before and since the start of the pandemic experiencing financial hardship walk away from their homes. They simply want to start a new chapter and put their problem property behind them. Many of them have still been able to build new lives, inside new homes, without the memories that took place in their former residence.
How We Can Possibly Help
Here is a home we were able to stop from foreclosure. Unfortunately, due to some non COVID related matters they fell behind on their mortgage and were unable to make payments since 2019. Both owners were going through a divorce and wanted no more responsibility for the property especially since they both found new accommodations. To make matters worse they had a relative living in the property who was not contributing to the monthly payments or upkeep of the property. Fortunately, they reached out at the right time. In less than 30 days they were relieved from the headache, heartache and gave them the peace of mind they so desperately needed.
Thank You! You were the right person in the right place at the right time. I prayed for a miracle and there you were