What Happens if You Abandon Your Home and Let It Foreclose
What Happens if You Abandon Your Home and Let it Foreclose?
When you are facing foreclosure, it can be tempting to just give up and walk away from the home. Before abandoning your mortgage, you should consider the possible consequences of letting your home foreclose. Sometimes abandoning a house might seem like the best option, but foreclosing on your home often does more harm than good.
Besides losing your home and possibly having no place to live, allowing your home to be foreclosed will dramatically 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 before you make the decision to let your home go into foreclosure.
So what happens if you abandon your home and let it foreclose? This article will help you understand what the consequences will be if your home ends up being foreclosed. It will also give you an idea of what to expect and offer some options for those who want to try to save their homes and avoid foreclosure.
The Effect of Foreclosure on Your Credit Rating
You may be wondering what happens to your credit with a foreclosure. 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.
If your foreclosure was not caused by an injury or other unexpected circumstances that prevented you from being able to make your payments, perhaps you have issues with debt management that should be addressed. Companies like Freedom Debt Management can help you eliminate your credit card debt and eventually rebuild your credit so that you will be less likely to get in trouble with your debts in the future.
One question that is asked often is, "If my house is foreclosed, can they make me pay?" In many states, the answer is yes. This is happening much more often now that it used to. The reason is that real estate prices have fallen, so it is much more likely that your home will be sold for less than the amount of the loan. If your state allows deficiency judgments, the lender can come after you for the difference between the amount you owed on your mortgage and the price the house sold for at the foreclosure auction.
The 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. By working with your lender, you may be able to stop foreclosure on your home.
Deed in Lieu of Foreclosure
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.
One alternative to abandoning your home is a short sale. Unfortunately, you need the bank's cooperation to do it. When you sell your house in a short sale, the bank agrees to accept the amount that the house is selling for as full payment on the mortgage. Some banks will not do short sales at all, and those that do will make you jump through a lot of hoops and fill out tons of paperwork to get the sale approved. As a result, short sales are rare. However, if you can do it, a short sale is better that letting your house go into foreclosure.
A loan modification is an agreement between you and the bank that changes the terms of the loan. It is just about as hard to convince a bank to enter into a loan modification agreement as a short sale, maybe harder. If you pursue this option, it is a good idea to have an experienced attorney or loan modification company help you through the process.
How to Foreclose on Your Home
I see a lot of people searching for how to foreclose on a house, so I'll take a minute to address that question. Obviously, if you don't pay on your mortgage, your home will eventually be foreclosed, but I think if you are searching for information on how to foreclose your home, what you are really asking is whether you should tell the bank that you are letting your home go into foreclosure.
The answer to that question is that it is entirely up to you. You can tell your mortgage company that you can no longer pay the payment, or you can just stop paying it. If you notify the lender, you can expect the foreclosure process to start sooner than if you don't, so telling them may not be in your best interest. What happens when you foreclose on a house and can't find another house to move into before you have to vacate the premises? You will need both time and money in order to move. You may find that you will be better off if you try to delay the foreclosure while you save money for rent and moving expenses.
What Happens In a Foreclosure?
So what happens when you foreclose? That's a good question. First of all, once you have started falling behind on your payments, you will get a notice that your payment is past due. You may also start getting collection calls from the lender. The mortgage company may continue sending past due notices for two to three months before starting the foreclosure process, or they may begin foreclosing as soon as you are late on your mortgage.
Notice of Default
The foreclosure process varies from one state to another, but all states require some sort of notice before the bank begins foreclosure proceedings. This may be called a "notice of default," "notice to accelerate," or "demand letter," depending on where you live. In most areas, you'll have about thirty days to catch up on your mortgage before the lender can take further action to foreclose on your home.
Notice of Foreclosure Sale
After you have been sent a notice and the waiting period has expired, the lender can set a date to sell your house at a foreclosure auction. They may be give notice of the foreclosure auction date by mail or by posting at the home, but in most places it is done by publishing a public notice in the local newspaper. Once the notice is published or delivered, you will no longer be able to save your home by bringing your payments current. You will now have to pay the entire loan amount in order to stop the foreclosure.
The Foreclosure Auction
At the foreclosure auction, bidders will be given a chance to bid on the home. If the high bid is equal to or greater than the amount owed, the high bidder will take possession of the home following the redemption period, if there is one. Otherwise, the bank will end up taking ownership of the home.
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.
What Happens After Foreclosure?
Now that you know what happens when you foreclose on a house, you might be wondering what happens after home foreclosure. Once the redemption period is over (if there is one in your state), the bank will assume ownership of the home. It becomes part of the bank's REO, or real estate owned, inventory.
Bank-owned homes are typically listed with a real estate agent just as any other home would be. Foreclosed homes usually sell for less than other homes because they are often neglected during and after the foreclosure process. As a result, they are typically in need of some TLC by the time they hit the market and do not bring as high of a price as other homes in the same neighborhood.