Consequences of a Foreclosure
- Once your mortgage lender contacts the credit bureaus and updates your credit file, your credit score will nosedive after a foreclosure. A drop in your credit score affects your ability to get other types of loans such as vehicle loans, personal loans and credit cards. If you are approved for financing after the foreclosure, prepare for an extremely high interest rate and higher monthly payments.
- Selling a property before the lender actually forecloses is the only way to protect your credit score and benefit from the equity in your home. Once a lender takes possession of your home, you lose whatever equity you have in the property. Home equity is the difference between the property's value and what you owe on the loan.
- A large number of mortgage lenders will not touch your application for a new home loan after a recent foreclosure. You can recover from a foreclosure and buy another property, but don't expect a quick recovery. Credit scores have to improve first, and you can fix your low score with good credit habits after the foreclosure. Always pay bills on time and pay down debts. Plus, get your finances in order and start saving money for a down payment. After three years, you can get an FHA home loan with a 620 credit score and five percent down.
- Mortgage lenders resell foreclosed homes, usually at a home auction. If proceeds from the auction are enough to pay off the original mortgage balance, you don't have to pay any money. On the other hand, if the home sells for less than the mortgage balance, the IRS may require you to pay income taxes on the difference. A tax professional can provide more information on the tax consequences of a foreclosure, and options for debt forgiveness.
