We all know that foreclosures are on the rise throughout the nation. In fact, at the time of writing (June 2009) there is a foreclosure happening in the US every 13 seconds. In Nevada 1:27 homes is in foreclosure and 1:11 of all borrowers are now behind on payments. Staggering, but true!
Most people realize that a foreclosure means you will lose your home. They also know that having a foreclosure on their credit rating will give them an F rating, preventing them from having another home mortgage for between 7 to 10 years. It will also have a disastrous effect on any kind of future credit demand.
But What Exactly Is Foreclosure?
It is the legal procedure, ordered by a court, by which a borrower forfeits his or her property to the lender following the default of the home loan. The title to the property is either kept by the lender, or sold to a third party.
It sounds simple enough, but in reality, the foreclosure process is a drawn-out and lengthy ordeal. It is a gut-wrenching and personal nightmare for many people.
The Foreclosure Process
Foreclosure, itself, is the end result of the foreclosure process which can take many months to complete. It is culminated when the property is sold at auction.
In order for a foreclosure to happen, the following must be true:
- The property must be collateral for the debt, to be sold.
- The debt must be defaulted on, i.e. payments are not up to date.
- Creditor must fulfill all the state legal foreclosure requirements.
If you miss just one payment or are late, it does not mean you are in foreclosure. The creditor must take certain legal steps over a period of months before they can actually foreclose.
Usually, once there is a default, a lender initiates a collection process. This is the best moment for a homeowner to reinstate the loan and bring it current. Usually, if after three months the homeowner has not brought it current (cured the loan), the lender takes more drastic steps.
This starts with a legal notice to the owner informing them that if the loan is not caught up within a certain time frame, the property will be sold at auction. This period is known as pre-foreclosure. The owner has until the foreclosure date to resolve the loan. Ways to solve this default are: refinancing, paying off the debt in full, or selling the property. If none of the above happens by the auction date, the property will be sold to the highest bidder.
The proceeds from the sale are used to pay the creditors. Anything over that will go to the owner. Any deficiency can be pursued later by the bank if they feel you have other assets or income which would allow you to pay it.
Why Are There So Many Foreclosures Right Now?
Simply put, the government and the banks allowed over-mortgaging based on the assumption that house prices would rise indefinitely (you no doubt bought into the same fantasy too – hey, we all did, to a degree). They also allowed re-mortgaging with second, third or even fourth liens, subprime loans and ‘pay less now, but pay more later’ interest rate schemes which lined their own pockets in the short term, but which were doomed to failure in the long run.
Whether or not it was manufactured and there are people to blame, or that economies simply follow an up-and-down cycle naturally, does not change the fact that ours collapsed.
Housing prices have fallen dramatically, and many people now owe more on their property than the property is worth. This, in itself, is not an issue as long as you can still afford the monthly payments on your mortgage. You still have somewhere to live, and prices will no doubt rise again. If you can’t afford the monthly payment, however, the only option other than to allow foreclosure is to short sale the property.
To do this, you need to find a buyer willing to wait, you need to put together your case and persuade the bank to accept less than they are owed, and then you need to sell the property.
Easier said than done … but that is where we come in!
What Foreclosure Does To Your Credit Score
A foreclosure will stay on your record for 10 years and will reduce your FICO score by at least 350 points, depending on your credit history outside of the defaulting on the mortgage. This is compared to the effects of a short sale which will reduce your FICO by only 100-150 points and stay on your record for far less time.
Tax Ramifications Of Both Foreclosure And A Short Sale
In either scenario; foreclosure or short sale, you will be sent a 1099c tax form showing the forgiveness of debt, i.e. how much you were let off paying. This is considered as income by the IRS and has to be declared. Since the recent new laws, anything less than $500,000 is not in fact taxable; however, if this is your primary residence.
