In this day and age, foreclosure is not an uncommon thing. When people face problems with repayment, the lender may force them to sell their assets in order to pay the debt back. If you are still unable to pay them back, they may foreclose on your property. However, that doesn’t mean that you are completely free of all your debt. You may even need to go into a debt settlement program.
What is a Foreclosure?
One of the most commonly asked questions pertains to what exactly a foreclosure is. When your home is foreclosed, your lender takes your house from you because of your inability to pay the rest of your mortgage in the given period.
Fortunately, a foreclosure does not happen magically overnight. You are always given a certain period before the bank forecloses on your property. This is known as a redemption period. This period can range from 6-12 months. This period is usually a homeowner’s one final chance to ‘redeem’ themselves and their property.
In this period, you must make up for all your short payments in order to stay on track. Unfortunately, this is not an easy task. Not only do you have to make up for all your short payments, you also have to continue making the new ones. Then again, if your lender has decided to foreclose on your property, it is likely that your redemption period is about to end or you are unable to pay them back.
The Credit Drop
Not everything becomes rainbow and sunshine after foreclosure. There are many negative effects a foreclosure has on you and your future. After your home is foreclosed and you have no debt to recover, your credit score usually takes a huge hit.
Depending on the home and your payment history, your credit score can drop as much has 250 points. Furthermore, this foreclosure can stay on your record for approximately 7 years. After a foreclosure, most people are unable to get a new loan either.
No Future Loans
A foreclosure is practically the worst thing that could happen to you in terms of future planning. When your home is foreclosed, no lender will ever trust you with another loan, until you prove yourself ‘worthy’ of the loan. In other words, until your credit score improves, you cannot take another loan.
According to many debt settlement programs, it takes most people at least 2 years before they can qualify for a new home loan. This can be really problematic if you need an emergency loan. Even in cases of emergencies, most lenders will not give you a loan because, according to your credit score, you will not be able to pay them back.
You May Still Have to Pay the Deficiency
In many states, you may be required to pay off the gap in the mortgage. Real estate prices have gone down a lot in the past few years. You may have bought a house for $500,000, 3 years ago but it is probably worth $300,000 by now. If you paid $100,000 of your mortgage, your lender can still force you to pay the remainder of the mortgage. Luckily, this does not happen in every state.
You have to Pay Tax
As already said, not everything is rainbow and sunshine after your home is foreclosed. Your lender may have let you off the hook but that does not mean you do not have to pay tax on the property. When your home is foreclosed, not only does your credit score drop but a tax penalty is also imposed on the owner.
So now, not only is your home foreclosed, your debt irrecoverable and your lender after you for the remainder of the money, you now also have to pay tax. Talk about bad luck! The unfortunate part is that this happens a lot to people when their home gets foreclosed and they have no debt to recover.
Don’t let this happen to you. When you start falling behind on your mortgage payments, let your lender know. They will be more than happy to work out different terms that would allow you to make your payments.