After foreclosure, most families have to climb an uphill battle to put their lives and their credit back in order.
We have all heard the news. Foreclosure rates are skyrocketing. More families are in danger of losing their homes than ever. However, what we do not hear is what happens to these families after foreclosure, that is after the bank has reclaimed their homes?
What happens to your credit after foreclosure?
The impact of a foreclosure on your credit score is going to be pretty big. There is no getting around that. When you default on a loan the size of a mortgage, it is going to have a ripple effect through.
Unfortunately, if your credit score was good beforehand, you are going to feel the hurt a lot more than someone who already had a blemished credit report. On the bright side, you will also be able to heal your credit after foreclosure a lot faster if it is the only blotch.
Chances are you will face other problems, too. The interest rates on your credit cards may increase because you suddenly become a higher risk. You probably will not be able to get a car loan and if you do expect to pay very high interest rates for the privilege.
You may also have a difficult time finding a new place to live after foreclosure since most apartments or rental properties do credit checks on potential tenants. That means you will probably need a sizable deposit before moving in.
How long before you can qualify for a new mortgage?
While a number of factors can contribute to the answer to this question, the real answer is not as long as you might think. As long as you maintain stable employment and continue paying your bills appropriately, you are going to have a good chance to get a mortgage loan after foreclosure and become a homeowner in the near future.
Now if you try to go through Fannie Mae for the loan, you are going to be waiting about five years, possibly four if you can explain why the foreclosure occurred. On the other hand, if you qualify for a FHA loan, you will only have to wait three years.
Regardless of the length of time you wait, make sure to be saving up a down payment for the new property. Having money to invest upfront in the property will increase your odds of being approved for a new loan and saving the money will demonstrate that you have learned something from the foreclosure process.
What about my taxes after foreclosure?
While most people worry mainly about their credit after foreclosure, it might be the tax bill they have to worry about. When the bank sells the property and cannot recoup the full amount of the mortgage, that extra amount might be forgiven and that makes it taxable income.
However, recent relief measures mean you will not have to pay those taxes unless the property was not your primary residence and/or you took a cash-out refinancing on the property. Even in those situations, you might still be able to escape that hefty tax bill if you can show that you do not have the means to pay it.
As you can see, after foreclosure your personal finances need not be hopeless after all.