How A Foreclosure Can Affect Your Future

If your home unfortunately, ends up in foreclosure, chances are there are lots of things you should be thankful for: your family, your health and your striking good looks! Foreclosure doesn't have to mean the end of the world (although it may feel like it) nor does it mean you are irresponsible or undeserving. Foreclosure can be the result of many factors such as bad timing or an unforeseen life event. Nevertheless, foreclosure and its associates, missed mortgage payments and short sales, do have credit, legal and tax consequences. Here are the consequences of each:

Missed Mortgage Payments

Other than the lender's late fee, there are no credit or other consequences of your mortgage payment being late until it is 30 days late.  Unfortunately, one 30-day late mortgage payment can drop your FICO credit score from 50 to 100 points and stay on your credit report for 7 years. If you resume paying your mortgage payments after missing one payment (without catching it up) that one late payment becomes a "rolling late," reported as 30 days late, then 60 days late, and so on. The majority of mortgage lenders will not make a mortgage or refinance to a borrower with more than one 30-day late mortgage payment on their credit report within the 12 months preceding the application for credit. After the 12 months you will most definitely be charged with a higher interest rate and be subject to tougher terms and guidelines if you have any "mortgage lates" on your credit report. Late mortgage payments will also be reflected on your credit report for seven years, but the negative impact on your FICO score will decrease as the late payment ages.

Selling Your Home:  A Short Sale

A Short Sale is when you sell your home for less than the full amount that is owed, and your lender writes off the debt as a loss, your FICO score will drop between 80 to 100 points. It will take approximately 18 months of credit restoration, which will include, on-time credit payments to restore your credit score to a level where you will be able to acquire a new mortgage with decent interest rates and terms. Legally, mortgage and lien-holders have to agree to extinguish their debts on the home in order for the short sale to proceed; they cannot sue the homeowner to recover the loss they incur when selling the home short.  Until December 2007, homeowners of properties sold through a short sale were charged with taxable income for every dollar of debt forgiven through the short sale. Under the Mortgage Forgiveness Debt Relief Act of 2007, though, mortgage lenders will not charge owners of foreclosed homes with taxable debt relief/income through the end of 2009.

Foreclosure and Deed in Lieu of Foreclosure

If your home is lost to foreclosure or you give it back to the lender via a deed in lieu of foreclosure, your credit score will go down by 250 to 280 points. It will take about three years of consistent, on-time credit payments to restore your credit score to a level where you will be able to get a new mortgage with favorable interest rates and terms. Even if your lender is entitled to come after you for the difference between the market value of your home at the time of foreclosure and what you owe on the home, they almost never do, the time and cost is not really worth it, especially after they have spent upwards to $80,000 to foreclose in the first place.  Tax-wise, mortgage debt relieved through foreclosure used to be potentially taxable as income, depending on the mortgage. As always consult with a CPA or Attorney if you are considering a short sale in either of these situations. Some information contributed by Tara-Nicholle Nelson, Esq.

By Sonda Hilario