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What Are the Drawbacks to Home Foreclosures?
Author David Schneider | Dec 31,2007
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A foreclosure is a legal action in which a lender who has not received payments as promised by the borrower attempts to recoup its losses by repossessing property. While the concept itself is simple to understand, the process can be quite complex. If you are no longer able to make your mortgage payments, you need to understand how foreclosure works. Only then can you decide whether to accept the foreclosure process or look for other options.
How Foreclosures Work
Although the procedure can vary, depending on your state of residence, foreclosure generally follows a certain course. If you miss your mortgage payments, the lender will probably contact you and attempt to recover the funds. If you are unable to come up with the money, the bank may decide to pursue foreclosure.
At this point, they will serve you with a legal notice of intent to foreclose. If you cannot dispute the charges, the lender then initiates the sale of your home to recover its losses.
After the lender conducts the foreclosure sale, you will no longer own the home. The entire foreclosure process can take anywhere from a couple of months to a year or more, depending on how aggressively your lender pursues your case. This does not mean that you will just be living in your own home, rent free, while the foreclosure process runs its course. Your lender will hold you responsible for mortgage payments during this time, plus late fees and other assorted charges.
Financial Drawbacks to Foreclosure
Foreclosure can have financial repercussions for many years after it happens. If you think of foreclosure as just an easy way to get out of making mortgage payments, consider all the possible drawbacks to foreclosure.
Your Credit Score and Foreclosure
One of the biggest drawbacks to foreclosure is that it goes into your credit report. This will trigger a significant drop in your credit rating. If you need to access credit for another home (or car, or credit card), you will no longer qualify for the rates you had before foreclosure.
Another drawback to foreclosure is that it could give you even more debt. If your home sells for less than what you owe on the mortgage at the foreclosure sale, the bank may require you to pay the difference. Whether $1,000 or $100,000, your bank can pursue the money through collections, legal action or even wage garnishment.
Even if your lender forgives this debt, the IRS won’t. You will be required to pay income taxes on any foreclosure debt that is forgiven.
The snowballing effects of foreclosure may even be enough to produce an even worse consequence by way of bankruptcy. While bankruptcy is not a direct outcome of foreclosure, the credit and debt effects can become so overwhelming that bankruptcy becomes an option.
Other Drawbacks to Foreclosure
Drawbacks to foreclosure aren’t just financial. Even though it’s becoming more common in today’s housing market, it’s still an embarrassing and uncomfortable situation.
One of the practical drawbacks to foreclosure, obviously, is that you will lose your home. If you are unable to financially manage another home loan or rental, you may have to rely on your friends and family for help. In the worst cases, family members can be separated, as they scramble to come up with an acceptable housing situation.
Public notification is a standard part of foreclosure and may cause you significant embarrassment. Your lender will print your name and address in the newspaper to notify potential buyers of the foreclosure sale. Law enforcement officers may come to your home to serve you with papers or evict your family and belongings. Public embarrassment is definitely one of the bigger drawbacks to foreclosure.
Protecting Yourself from Foreclosure
If you find yourself in danger of foreclosure, and want to avoid all the financial and social drawbacks, you do have a few options to consider. You may sell your home before foreclosure proceedings, refinance your mortgage or approach the lender to negotiate a more manageable payment plan. As a last resort before foreclosure, you could propose to your lender the option of a short sale, in which your home sells for less than you owe on the mortgage.
Going through foreclosure can have significant drawbacks to your financial future and personal life. If you are faced with the prospect of foreclosure, you should explore all the options available to you before it’s too late.
A foreclosure is a legal action in which a lender who has not received payments as promised by the borrower attempts to recoup its losses by repossessing property. While the concept itself is simple to understand, the process can be quite complex. If you are no longer able to make your mortgage payments, you need to understand how foreclosure works. Only then can you decide whether to accept the foreclosure process or look for other options.
How Foreclosures Work
Although the procedure can vary, depending on your state of residence, foreclosure generally follows a certain course. If you miss your mortgage payments, the lender will probably contact you and attempt to recover the funds. If you are unable to come up with the money, the bank may decide to pursue foreclosure.
At this point, they will serve you with a legal notice of intent to foreclose. If you cannot dispute the charges, the lender then initiates the sale of your home to recover its losses.
After the lender conducts the foreclosure sale, you will no longer own the home. The entire foreclosure process can take anywhere from a couple of months to a year or more, depending on how aggressively your lender pursues your case. This does not mean that you will just be living in your own home, rent free, while the foreclosure process runs its course. Your lender will hold you responsible for mortgage payments during this time, plus late fees and other assorted charges.
Financial Drawbacks to Foreclosure
Foreclosure can have financial repercussions for many years after it happens. If you think of foreclosure as just an easy way to get out of making mortgage payments, consider all the possible drawbacks to foreclosure.
Your Credit Score and Foreclosure
One of the biggest drawbacks to foreclosure is that it goes into your credit report. This will trigger a significant drop in your credit rating. If you need to access credit for another home (or car, or credit card), you will no longer qualify for the rates you had before foreclosure.
Another drawback to foreclosure is that it could give you even more debt. If your home sells for less than what you owe on the mortgage at the foreclosure sale, the bank may require you to pay the difference. Whether $1,000 or $100,000, your bank can pursue the money through collections, legal action or even wage garnishment.
Even if your lender forgives this debt, the IRS won’t. You will be required to pay income taxes on any foreclosure debt that is forgiven.
The snowballing effects of foreclosure may even be enough to produce an even worse consequence by way of bankruptcy. While bankruptcy is not a direct outcome of foreclosure, the credit and debt effects can become so overwhelming that bankruptcy becomes an option.
Other Drawbacks to Foreclosure
Drawbacks to foreclosure aren’t just financial. Even though it’s becoming more common in today’s housing market, it’s still an embarrassing and uncomfortable situation.
One of the practical drawbacks to foreclosure, obviously, is that you will lose your home. If you are unable to financially manage another home loan or rental, you may have to rely on your friends and family for help. In the worst cases, family members can be separated, as they scramble to come up with an acceptable housing situation.
Public notification is a standard part of foreclosure and may cause you significant embarrassment. Your lender will print your name and address in the newspaper to notify potential buyers of the foreclosure sale. Law enforcement officers may come to your home to serve you with papers or evict your family and belongings. Public embarrassment is definitely one of the bigger drawbacks to foreclosure.
Protecting Yourself from Foreclosure
If you find yourself in danger of foreclosure, and want to avoid all the financial and social drawbacks, you do have a few options to consider. You may sell your home before foreclosure proceedings, refinance your mortgage or approach the lender to negotiate a more manageable payment plan. As a last resort before foreclosure, you could propose to your lender the option of a short sale, in which your home sells for less than you owe on the mortgage.
Going through foreclosure can have significant drawbacks to your financial future and personal life. If you are faced with the prospect of foreclosure, you should explore all the options available to you before it’s too late. |
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