Learn about foreclosure and its impacts on an homeowner

Foreclosure is a legal process used by mortgage lenders to sell a home if the owner is in default on his or her mortgage loan. A lender usually goes for the foreclosure when the homeowner has not made his payments. This process usually varies from state to state.

For instance, in some states, a foreclosure must go through a legal court process before the lender sells the property. On the other hand, the foreclosure sale is usually done by advertisement in other states of the country.

Foreclosure is a long process, which means the court can evict you from the property. The mortgage company needs to follow some steps and prove their point against you in court. They can’t lock you out of your home without a court’s order. Read on!

Foreclosure Facts – The Dark Side

• In the U.S, 2 out of every 150 houses will be foreclosed upon. In some cities like Washington DC, research shows that over 3,000 households lose their houses to foreclosure each year.
• According to the Mortgage Bankers Association, more than 250,000 new households enter into foreclosure every three months in the U.S.
• One child in every classroom is at high risk of losing a home because his or her parents cannot pay their mortgage.
• A slow real estate market translates into falling home values and prices.
• Many people who applied for adjustable mortgage rates find that as the rate of the mortgage adjusts higher, their house value becomes lower. For such people, refinancing is not an ideal option.

How Foreclosures Affect Homeowners?

Foreclosure has numerous negative effects on a homeowner. For instance, the forced loss of a home can cause a homeowner to feel sadness and shame. Most often, the situation is behind your control, still, this process carries the stigma of personal irresponsibility.

·       Equity

Foreclosure usually involves surrendering your home, irrespective of what you owe. Any equity in the house becomes the lender’s property. You lose the down payment and the value of any home improvements that you have made. If your home sells at a loss, the lender can sue you to recover funds.

·       Credit Score

According to the Mortgage Bankers Association, foreclosure significantly affects your credit score. You may lose up to 40% of your credit score by the time the process of foreclosure is complete. Both notices and judgments, which are related to the foreclosure process can pull down your credit.

·       Credit Availability

Since foreclosure damages your credit, it is hard to get credit for a few years. Even if you get credit, it will come with lower limits and higher interest rates. You can apply for a secured credit card but the company will hold a deposit equal to the credit limit.

·       Taxes

A foreclosure can also have negative tax ramifications. This depends on your personal situation. For example, any losses accrued by the mortgage lender on a foreclosure or short sale are considered as income for tax purposes.

The Internal Revenue Service (IRS) requires the homeowner to pay taxes on the increased income. This raises the burden of taxes and put the homeowner in a high tax bracket. When the mortgage lender sells your home at a profit, you will be liable for taxes on the profit.

·       Emotional Impact

You may not contact your lender because you are embarrassed. You don’t believe the lender will help you or think that it would cause you to lose your home more quickly. A recent research study shows that foreclosure impacts homeowners emotionally. According to the results of the study, 35% felt depressed, 38% were scared, 9% angry and 8% were embarrassed.

How Foreclosure leads to Home loss?

When an individual buys a property, such as a house, he or she may not have sufficient funds to pay the entire purchase price. On the other hand, a homeowner can pay a small amount upfront, which is anywhere between 5% and 20% of the price.

You still owe the lender thousands of dollars. The problem is that most people do not earn this much money annually. So, as part of the agreement with the lender, your property will serve as collateral for the loan.

If you don’t make payments on time, the mortgage lender may foreclose on your home. This means the lender can repossess it and evict you. In many situations, the lender sells your home to recover the funds or money they lent you.

In general, you will start receiving notices as soon as you miss making one payment. You may receive a notice that asks for moving forward with the process of foreclosure. A lender initiates the process of foreclosure 3-6 months after you fail to make the first mortgage payment.