What Happens If You Abandon Your Home and Let It Foreclose?
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The Consequences of Allowing Your Home to Foreclose
When you are facing foreclosure, it can be tempting to just give up and walk away from the home. Before you do that, you should consider the possible consequences of letting your home foreclose.
Besides losing your home and possibly having no place to live, allowing your home to be foreclosed will affect your credit rating and make it more difficult for you to qualify for a new loan in the future. There are also tax consequences of foreclosure that you should be aware of.
This article will help you understand what the consequences will be if your home ends up being foreclosed.
The Effect on Your Credit Rating
You are probably aware that a foreclosure will hurt your credit score. How much it affects your score can vary, but keep in mind that every late payment will show up on your credit report. Also, when your home does go through foreclosure, an entry will be made in the section of your credit report that covers legal actions.
A foreclosure tends to affect your credit score more if you have very little other debts. If you have credit cards and car payments that are all up to date, this can help buffer the effect of the foreclosure on your credit rating. However, if you have few other items on your credit report, or those bills are also falling behind, the effect will usually be much greater.
The foreclosure and late payment record can remain on your credit report for up to seven years, but that doesn't mean that you will be unable to get a loan for seven years. As soon as your financial situation improves, you should start making an effort to pay every bill you have on time. Many people find that after as little as two years of doing this, they are able to qualify for a new loan.
After going through a foreclosure, it is likely that you will need a large down payment next time you borrow money to buy a home. Your interest rate is also likely to be higher. Keep in mind that government programs such as Fannie Mae and Freddie Mac are unavailable to people who have had a home foreclosed within the past two years.
Tax Consequences of Foreclosure
One thing many people don't realize is that there is often a tax penalty that goes along with foreclosure. What happens is, if the house sells for less than the amount owed, the rest of the loan balance is considered "forgiven."
The IRS looks at this as income because it is something you would have had to paid but are getting out of. As a result, you may be taxed on the difference between the amount you owed and the amount the house sold for.
It is a good idea to talk to an accountant or tax lawyer about the possible tax consequences before you allow your home to foreclose.
Other Real Estate and Property
One thing people often worry about when facing foreclosure is whether the lender will be able to take other property and real estate that they own as well. Because real estate loans are secured by the property that is being financed, that property is usually all that the lender can take. However, if you specifically listed another piece of real estate as additional security when you applied for the loan, that property can also be taken.
When your lender forecloses on your home, your personal property is not included in the foreclosure. The lender has no claim on any property that is not permanently attached to the house.
Options for Avoiding Foreclosure
Instead of walking away from the house, it's a good idea to contact your lender as soon as you start to have trouble making your payments to try to work something out. Many lenders have programs available to help homeowners who are going through short-term financial difficulties.
If it looks like you will not be able to work out a way to keep your home, some lenders will offer a "deed in lieu of foreclosure" or "cash for keys." If you can get your lender to pay you to move out quickly and leave the home in good condition, that could help you pay the cost of moving into a new home. However, a deed in lieu of foreclosure usually has about the same effect on your credit rating as an actual foreclosure.
The Redemption Period
In many states, there is something called a "redemption period" in the foreclosure process. How this works varies from one state to another, so you should check your state's foreclosure laws to find out whether you will have a redemption period, and if so, how long it is.
If there is a redemption period, you will have a certain period of time after the home is sold at auction during which you can come up with the balance owed on the home and redeem the home. The redemption period is often between 6-12 months.
This gives the homeowner a chance to try to find a buyer for the home in order to pay off the loan balance. Even if you cannot find a buyer, you are entitled to stay in the home during the redemption period. During this time, you are basically living rent-free in the home. It's a good idea to use this time to save money to rent another home or apartment.
Help With Loan Modification
If you decide to try to keep your house, you will need to try to work something out with your lender. Many banks are hard to work with. As a result, the loan modification process can be frustrating, but there is help available. The EZ Loan Modification Hero guidebook will walk you through the process. Using this book as a guide, you can negotiate your own loan modification without paying hefty upfront fees to a loan modification company.
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Comments
I'm into property auctions which usually translates into "handling" houses already left by their previous owners. Though it's a good thing to stay away from homes of friends who lost their homes, sometimes that is not avoidable. That being so, I've always wondered how the previous owners dealt with the prospect of losing their homes. Your hub addresses exactly that, and I can only say I'm glad it does.
With so many banks not wanting any more foreclosures you would be crazy to not attempt to work out some kind of deal. Opening the lines of communication between you and your lender can actually keep you in your home and salvage your credit rating.
My wife is in a 7/1 interest only loan, and it starts to flex in 2 years, plus we will have to pay the principal. I can see already that our interest only loan is way over our heads once the principal does kick in. I expect our loan to go from about $2,500 to $3,500. I dont think my wife ever actually figured what she may pay after the interest only period ended. To make it worse, we live in a so/so area in a 2 bedroom 1 bath house for $385,000. I believe its a matter of time before we lose our house. I want to force the issue by missing payments and see if the bank will help us or if we foreclose and move into something we can afford. To this point we dont qualify for refinancing or a loan mod, nobody wants to help. I'm prepared to gamble, and lose if thats what it comes down to.
Brian,
It sure looks like you are in over your heads, but keep in mind that if you allow this home to go through foreclosure, it will affect your credit and possibly keep you from buying another home for two or more years. It sounds like this home is in your wife's name only. If that's the case, you may still be able to buy a home in your name if you lose this one. That depends on your income and credit history of course.
If you do end up losing this house, you may have to rent for awhile before you can buy another home. Since your mortgage payment is $2,500 per month, I think it's likely that you will be able to find a nice place to rent for significantly less. If you can rent for $1500 per month and save the extra $1000, then in two years you will have $24,000 to put down on your next home. Hopefully, you will buy something a little more modest this time so that you can keep up with the payments. Don't try to buy the most expensive home you think you can afford. If you lose your job and have to take something that pays less, you still want to be able to keep up with your payments.
my boyfriend and I purchased a home together a year ago ... the home is affordable with both incomes BUT he has decided to venture away from the responsibility and now I'm forced to worry that I can't keep the home and all the other responsibilities that go with the home with only my income. How many months can I go without making a mortgage payment b/c they will be obviously be late and therefore, will loose the home to foreclosure. This will obviously affect our credit on both sides regardless. Please help!
Worried in Texas,
I am not a lawyer, so take this as just one person's opinion.
If you are absolutely certain that you cannot afford this house, your only options are to sell it quickly for enough to pay off the loan (much harder said than done, and you will need your boyfriend's cooperation to sign the documents) or let the house go through foreclosure. If you let the house go through foreclosure, I recommend that you stop making payments completely. If you try to make partial payments, the bank will still continue with the foreclosure process and you will have less money to move into a new home. Stay as long as you can and save every penny for moving expenses and rent on your new place.
Yes, this will affect your credit. You probably won't be able to get a new home loan for at least two years if you go through a foreclosure. However, you should be able to find a place to rent.
The only other option I can think of is to share the expenses. It's unclear from your comment whether the boyfriend is still in the picture or not, but if he has moved out then perhaps you could find a friend or relative to "house share" and help out with the expenses.
Good luck.
I OWN A 3 UNIT APARTMENT IN WHICH I LIVE. AM AT THE AGE WHERE CREDIT RATINGS MEAN VERY LITTLE. HAVE RECENTLY GONE THROUGH BACK SURGERY WHICH HAS HAD ME UNABLE TO WORK FOR ABOUT A YEAR. HAVE HAD NUMUROUS DISSCUSSION WITH THE LENDERS, YES I HAVE A SECOND MORTAGE. I HAVE NOW MISSED FOUR PAYMENTS ON BOTH. I'M SURE THE PROCESS IS UNDERWAY I WOULD LOVE TO JUST STAY HERE AND PAY RENT. THE OTHER UNITS ARE RENTED ALSO. CURRENTLY THE VALUE OF THE PROPPERTY IS LESS THEN THE LOAN AMOUNT. WOULD THIS BE LOGICAL THINKING? WHEN BEING FORECLOSED ON?
Robert,
You could try calling local real estate investors to see if anyone can help you out. Depending on the amount of equity in the apartment building, an investor may be interested in the property. Try calling the numbers on "I Buy Houses" ads and signs to find investors who might be able to work with you. Just proceed with caution -- don't be afraid to ask them to prove they can make the payments if they offer to take them over, for example.
Good luck.
Great post Beth!
I've heard differing opinions about whether they can go after other assets. I recently was told by a bankruptcy attorney that the lender can actually go after other assets.
Maybe it varies by state?
Hi,
My husband switched careers in 2006 to real estate and gave up his own business. The market crashed and we ended up in bankruptcy in 2008. We have 3 loans on our house - 1st at $327,465 interest only which will become adjustable next January. A 2nd, for $169,784 that we renegotiated and is at zero interest and a 3rd renegotiated equity loan for $23,538 at 4.5%. A total of $520,787 is owed on the home. Our combined mortgage payments are $3,600. The value of our home is now far less than what we owe - by approx $140,000. Also, my husband is now back in his original business but his commute/travel expenses are $3,000 a month because that business is 4 hours from our current house. If we foreclose on this house, we could move back to the area where he works. This is an agonizing decision as this is our home, we have kids in school here, and we will be dishonorable if we walk. Given that we have already filed bankruptcy, renegotiated the second and third and are making our payments, does it make sense to allow a foreclosure? Will we even be able to rent if we do this? Feeling like I've been punched in the gut.
Alanaindigo,
Only you can decide whether it makes more sense for you to go through foreclosure or keep trying to keep up with the payments. Obviously, if you go through a foreclosure it will have a negative impact on your credit. Even with a bankruptcy on your record already, it can still get worse.
You shouldn't have trouble finding a place to rent due to the bankruptcy and foreclosure as long as you can find a place available to rent that suits you. You are probably not going to find any $500,000 houses for rent. Some landlords do credit checks and others don't so it may or may not affect your ability to rent a given home. However, there is a good chance that you would be able to rent something. If you are really concerned about whether you will be able to rent, try finding a rental first and see how it goes.
Since you have already been through a bankruptcy and renogotiated the loans, I am sure that will have some bearing on your situation. I don't know much about bankruptcy law, but you will need to consider what effect, if any, it will have on your credit and on the bankruptcy itself if you do not keep up with your payments as agreed upon in the bankruptcy.
I'm in a situation were I'm already 11 months late on my payment,guess I'm just waiting to get the foreclosure letter from the lender, but yet there's no sign of that letter. How will that play out when they don't give me the notice and just come home with a lock on my front door left by the lender....what happen to all my asset in the house?? please reply and shine light to this situatuion..
I don't know what state you're in, gix, but there is probably a law preventing the lender from putting a lock on your house without giving notice. You'll need to check the laws in your state to find out what is required. I'm afraid I can't help you any more than that without knowing where you are.
i live in Indiana. My boyfriend is buying a home and i am moving in with him. I have a house that we have been living in, i wish i could sell my home but i would have to put to much money in it that i don't have (unemployed). I'm thinking of letting it foreclose. I have the mortgage and an equity loan, what would happen to the second loan, would i still have to pay that? can i just get in contact with the lender and tell them i want to foreclose? how does this work?
Tammie,
It's best to avoid foreclosure if you can, but to answer your question about the second mortgage, once your house makes it through the auction sale, the second mortgage will be wiped out. There may be tax consequences for this. The IRS counts forgiven debt as income.
You can contact the lender and tell them you are going to stop paying the payments if you want to. That is up to you. If you do, I'd wait until after you move.
Overall, a good hub. Too bad that a hub like this is needed at all. But recent indicators are that we are not out of the woods on the foreclosure bit at all. The economy is still bleeding.
Great hub... lots of great info here.
Hi
The mortgage is just in my husbands name does that mean just his credit gets trashed or both ours? The house on the otherhand is in both our names?
Look forward to your reply many thanks in advance
Tracey
I am decided to abandon an apt I bought as an investmen alone, my wife does not appear as owner. also have a equityl line of credit over my home which is paid in full,and is on my and wife names. If I get a deficiency judgment
on the apt. can my equity line can be used by my creditors to collect?
genaro,
I am not a lawyer, but I would say no. An equity line is not an asset. I can't see how a court could force you to incur a new debt to pay off an old one.
So I own a home in Arizona. It's a non-recourse state. We have decided we want to let it foreclose and are o.k. with the credit ramifications. Should we tell the lender we are not going to make anymore payments and begin offering the deed. The house is in saleable condition and we do not live there. How do you suggest we discuss this with the lender? What do we tell the lender for the 2nd?
chrisnsd,
It's totally up to you whether you tell the lenders and if so, what and when you tell them. If you don't live there and you don't have any stuff stored there, I'd say go ahead and tell them. If they get the foreclosure process underway now, they will be able to sell the house sooner and there will be less chance of it being vandalized before they can sell it.
What an excellent hub! I am very impressed. I'll have to go read some more of your hubs.
After a divorce and the ex leaving me with the house, second mortgage, and the house in foreclosure...should I also file for bankrupcy? I am so scared! I understand that my credit will be shot... but I truly don't believe I have any other choice... no one is willing to work with me... the house is sitting empty... I am renting curretly...this is all new to me and I pray that I am never in this situation again... How does all this work... I have no help... and am very confused by it all!!!
Very Sad,
Whether you should file for bankruptcy or not depends. If you think you might be able to afford to keep the home after restructuring your debts under Chapter 13, then maybe. If you are stuck with a deficiency judgment after foreclosure (where you still owe the lender money), a bankruptcy might wipe that out. However, you should only file for bankruptcy if you really need to. Having both a bankruptcy and a foreclosure on your credit record is much worse than just having one or the other. Of course, you should consider talking to a lawyer about your specific situation. I am just a writer.
realestateuk says:
8 months ago
Very helpful hub. As someone into real estate myself, I've spent time with people who had lost or who were about to lose their homes. It's good to know there are articles like yours, concisely written and paced well, that aim to help such people. Your perspective is much appreciated.