Mortgage Rates

Top 5 Reasons to Stay Out of Foreclosure

When the Great Recession hit the United States in 2008, the primary reason given for the financial collapse was bad mortgages. The biggest culprits were the sub prime mortgages given to people who, in reality, could not afford the homes they were buying.

Another problem that led to financial collapse was the artificial inflation of home values. Homes that should have been valued at $100,000 were suddenly getting valued at $300,000. Lenders were giving out mortgages or refinanced mortgages based on these inflated values and when the market bottomed out, homeowners were left with inflated mortgages they could not pay.

Rather than finding ways to pay their inflated mortgages, people started to leave their homes and accept foreclosure. We have all seen the financial effects that mass foreclosures can have on the global economy. But aside from losing your home, there are several good reasons why you should avoid foreclosure at all costs.

Deficiency Judgments

A common misconception about foreclosure is that, once the process is done, the former homeowner is off the hook for the remaining balance of the mortgage. Nothing could be further from the truth. A foreclosure works exactly like car repossession. The bank takes possession of the property, auctions the property off and applies the amount received at auction to the remaining balance of the loan. The difference between the auction proceeds and the balance left is sought out in a deficiency judgment. This is a legally binding court order that puts the former homeowner on the line for the remaining mortgage balance.

If your home was repossessed with a remaining mortgage balance of $200,000 and the house was sold at auction for $80,000, then you are responsible for that $120,000 difference. The bank can seize your assets, garnish your wages and keep taking from you until the debt is paid.

Sustained Credit Damage

A foreclosures stays on your credit report for seven years, which is three years less than a bankruptcy. But the immediate and sustained damage to your credit score is much more dramatic with a foreclosure than it is with a bankruptcy.

A foreclosure can cause as much as a 300 point drop in your credit score which could remain that way for several years. A bankruptcy can create a drop of around 200 points, but credit can be rebuilt almost immediately after a bankruptcy is filed. It can take years for a consumer to get any kind of credit after a foreclosure.

Credit Report Effects

Because a foreclosure causes an immediate and significant drop in your credit score, it can have an adverse effect on everything affected by your credit report. If you need to get government security clearance for your job, then you may experience issues with the foreclosure.

To some potential employers and apartment landlords, a foreclosure indicates a lapse in responsibility. That foreclosure could cost you a new job, a promotion and the chance to live in the apartment of your choosing.

Lost Value

One of the things that homeowners fail to keep in mind when they allow a home to go into foreclosure is the investment of time and money they will lose in the work they have done on their home. A major remodeling project that costs thousands of dollars and took weeks to complete is gone in the wink of an eye. The new roof you just installed, the new furnace and air conditioning system you had put in and the new landscaping you just paid for are now all gone.

Not only that, but if you financed any of those major improvements then you will be stuck paying for something that you no longer own. The financial loss of a foreclosure is not limited to the value of your property. It also extends to any money you put into your home that you are still paying on.

It Isn’t Necessary

The biggest reason to avoid foreclosure is that it isn’t necessary. If you know that you are unable to pay your mortgage then you have two options; sell your home or talk to your lender.

If the value of your home is not too over-inflated, then you can sell it at the break-even point and get out of the mortgage without any further damage to your credit. As a matter of fact, paying the mortgage off by selling your home satisfies the debt and stops the negative effect it is having on your credit score.

Read your mortgage to see what options exist if you run into financial problems. Do not avoid your lender when times get tough. Give your lender a call and discuss your options. The federal government also has options you can explore to avoid foreclosure as well. Remember, your bank wants you to keep your home, so call and talk to a representative before things get out of hand.

Walking away from a mortgage can sound like an easy way to get out of a debt. But a foreclosure will follow you for years and could wind up being much more trouble than you expected. Explore your options and do everything you can to avoid foreclosure.