These days, record-breaking foreclosure statistics are coming out with numbing frequency. But what happens to the thousands of families after their personal financial disaster is added to the mounting national count?
Unfortunately, once a foreclosure is final, the financial and emotional upheaval is far from over.
While there’s considerable pain, most foreclosure victims will eventually become homeowners again, says Jay Zagorsky, a research scientist at Ohio State University.
Still, that won’t happen anytime soon, especially since mortgage rule maker Fannie Mae has recently lengthened the time that must lapse between a foreclosure and approval for a new mortgage.
Here’s a look at the issues foreclosed families grapple with, and some smart solutions.
Consequences of foreclosure
- Finding a new home
- Suffering the credit fallout
- Buying another home
- Owing an employer an explanation
- Getting hit with a tax bill
- Living through loss
Finding a new home
The immediate problem is obvious: where and how to find a new place to live.
Lack of cash for a rental deposit is probably the biggest barrier to foreclosed owners getting re-established on their own. Landlords will sometimes accept tenants who have a credit score of just 580, says Maurice Ortiz, marketing director at The Apartment People in Chicago.
But if landlords look beyond a numerical score to credit records, a foreclosure may spook them, since it indicates the potential tenant hasn’t paid his housing bills, adds Ortiz. If the foreclosure can be explained, however, and if the rental candidate has a solid job history, he may be accepted.
Moreover, “if you’re on the edge, you may have to double your deposit,” says Mark Fogelman, president of Memphis-based Fogelman Management Group.
Scraping together a rental deposit isn’t easy for cash-strapped foreclosed owners.
“That’s why I recommend that people try to make plans as soon as they think foreclosure (is inevitable),” says Patricia Lynch, a corporate trainer with ClearPoint Financial Solutions in Richmond, Va. Anyone who has a FHA-insured loan who’s being foreclosed on should investigate the “cash for keys” program, whereby they get a check for up to $1,000 if they voluntarily vacate and leave their home “broom clean,” says Lynch.
Suffering through the credit fallout
Once owners default on their mortgage, other creditors consider it much more likely they won’t collect what they’re owed either.
“Credit cards have a ‘default’ rate, and (foreclosed owners) could see their interest rate jump to very high levels — as much as 30 percent,” says John Ulzheimer, president of consumer education for credit.com. “You’ll also have a hard time getting a decent car loan,” he adds.
If a foreclosure is an isolated event on an otherwise good credit record, consumers may be able to rehabilitate their record and garner better loans and card rates in 24 months, says Ulzheimer.
But since a foreclosure is rarely the former owner’s only credit slip-up, and foreclosures are often combined with the fallout of punishing rates, some former homeowners will never climb back up to a good credit score, Ulzheimer says.
Buying another home of one’s own
Fannie Mae has just upped the length of time it takes from the completion of a foreclosure sale until the borrower can get a new mortgage from four years to five years.
The extra year is designed to deter what Fannie Mae believes are borrowers who have made reckless debt decisions. But foreclosed owners who can explain that extenuating circumstances — typically situations beyond someone’s control, like a job loss — are the impetus for the foreclosure must wait only three years.
Perhaps the best option for obtaining a mortgage after foreclosure is with a federally insured FHA loan, says Jerry DuPaw Jr., a McHenry, Ill., mortgage loan officer.
The minimum time between the completion of foreclosure until when you can be approved for an FHA loan is three years — whether or not there are extenuating circumstances. Still, FHA borrowers will have to show that they’ve been practicing good bill-paying habits since the foreclosure.
Owing a potential employer an explanation
Should you lose your job as well as your home, your new job hunt shouldn’t be hindered by the subject of your foreclosure coming up in job interviews — unless you’re applying for a job in which you handle money.
“We recommend that employers do credit checks when they are concerned about how financially responsible someone is — which may be for any money-related position from a cashier to an accountant,” says Robin Throckmorton, a Loveland, Ohio, human resources consultant.
The federal Fair Credit Reporting Act has rules employers must follow, such as notifying the applicant of the credit check, and most companies limit checks so as not to run afoul of the law.
If a foreclosed owner is applying for a financial job, he or she should have an explanation ready, perhaps describing how the foreclosure has changed some of his or her personal money-management skills today, suggests Throckmorton.
Getting hit with a tax bill
It seems like the ultimate injustice: You lose your home and then weeks or months later you open the mail and find a bill for taxes on the amount of mortgage that the lender was never able to recover from the sale of the property.
Anytime debt is forgiven, it’s a potentially taxable event. You are not paying back money that you borrowed, so that money is considered income by the IRS.
However, there are some exceptions. Last year, Congress passed relief for foreclosed owners — but only those who lost their principal residence and didn’t have a mortgage that they had previously taken as a cash-out refinance, using the proceeds for expenses other than improving their home, says Julian Block, a tax attorney and syndicated tax columnist in New York City.
But foreclosure victims may still not have to pay a tax tab, even if they had a cash-out refinance. That’s because the IRS has long allowed taxpayers to escape a bill on forgiven debt if they are insolvent. If, for instance, you receive a Form 1099c from a lender saying it couldn’t recover $5,000 of what it was owed, but your debts exceed your assets to the tune of $15,000, you must file Form 982 with your tax return to clear your tax obligation.
Living through loss
The emotional toll of leaving a home and neighborhood are impossible to quantify. One recent report released by First Focus, a Washington, D.C., advocacy group, finds that some two million children are likely to be impacted by foreclosure in some way, including the disruption of being placed in a new school after a move.
One glimmer of hope is that the large numbers of foreclosures today may lessen the stigma of the event, says consultant Throckmorton. She remembers when job applicants had to explain frequent changes in employment, because jumping from job to job was frowned upon. “Now that’s considered normal — with foreclosures so much in the news, it may prompt people not to make judgments.”