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.
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Comments
6 Comments so far
David
If someone is underwater by a large amount the negative effects of foreclosure/bankruptcy/emotion will be outweighed by the HUGE benefits of being able to walk away and save money on a regular basis so that down the road they will be stronger financially and they WILL be able to by a home again.
They need to estimate how long it will take for them to have enough equity in their home to refinance and or sale on their own. Lets say it will take 10 years, assuming an annual 2 percent appreciation rate then they should determine how much can they save for that 10 year period. A friend of mine is underwater by 100,000. Assuming a 2 percent annual rate of return it will take about 10 years for her just to get even. If she walks away and dedicates herself to saving she can have about 125,000 in 10 years. a married couple could double that amount. It is better to walk away in these situations.
Anyway, each person needs to “run the numbers” and make a decision. Excel is a terrific sotware to use in this analysis.
Although there are emotions involved for sure, everyone needs to simplify things and make it a financial decision, a business decision. Leave the emotions out of it - though that may be tough to do.
C
I agree. I think most consumers who are already facing foreclosure already know the disadvantages. If they are already in that position, I doubt there’s any advantage for them to keep their house in this market.
C
apparently not everyone does their homework.
I would figure if you didn’t do your homework when you bought the house and are now in trouble, you would do it when you lose it. But NOPE, the government rewards irresponsibility
http://sfbay.craigslist.org/forums/?act=Q&ID=137451479
don
I am fairly certain the government has eliminated sending out a 1099 to homeowners who have gone through the foreclosure process…the current system is broken and the loan modification solutions the government has rolled out to day are highly ineffective….the only sensible solution is a direct reduction in the principle balance of homeowners who are underwater or facing foreclosure. The ideas of staying in a home that is tens or hundreds of thousands of dollars underwater often removes the concern over the future credit issues.
Franz Brandtner
I didn’t realize things were so bad in the US.
A foreclosure does leave a bitter taste in one’s mouth.
J Mann
Not a very balanced analysis. I agree with everything except paragraph 1, but that doesn’t mean that in all cases, “the benefits of foreclosure prevention far outweigh the consequences of allowing a foreclosure to happen”. It just means that people should think carefully about the pros and cons before making such a serious decision.
As to paragraph 1, that’s dead wrong. Unless you think that your house is seriously undervalued and is likely to recover that value reasonably soon, the money you have invested in an underwater house is a “sunk cost”, which means its gone.
If you had an uninsured house that burned to the ground, would it make sense to say that if you didn’t rebuild, you would “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”? No, of course it wouldn’t. If you have a $500,000 mortgage on a house that currently would sell for $300,000, and which you don’t expect to regain its value in the near future, then unfortunately you have already lost the money you have invested.