Life after foreclosure: Advice for becoming a homeowner again
A decade after the mortgage crisis, the effects of foreclosure linger for many who lost their homes after defaulting on a mortgage. So you may be wondering what happens to families after their personal financial disaster is added to the national count.
Unfortunately, once a foreclosure is final, the financial and emotional upheaval is far from over. The good news is that those who have endured a foreclosure may eventually become homeowners again.
“A lot of people who lost their homes during the housing crisis or afterward are now at a point where they’re thinking of getting back into homeownership,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “As a rule of thumb, some lenders may require a waiting period of seven years before a foreclosed homeowner can apply for a new mortgage.”
Here’s a look at the issues foreclosed homeowners 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 surprise 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. “(Foreclosures) are strong evidence that you failed to fulfill a financial obligation, and that scares landlords,” says Keith Watts, a real estate agent in Orange County, California.
“In the immediate aftermath of foreclosure, it may be significantly more difficult to receive approval on your rental application from a rental management group (that) will pull your credit file,” says the NFCC’s McClary.
He says renting from individual homeowners or smaller landlords may be easier.
“You may be able to make a more personal appeal to them and provide more information to support your case on how you’ll manage your rent payments.”
“It’s really a supply-and-demand thing,” Watts says. “Vacancy can be a big motivator and if a property has been on the market a while, or vacant for some time, the owner might take a chance.”
For free or low-cost help finding a place to live, you can reach out to the U.S. Department of Housing and Urban Development’s Office of Housing Counseling. They can connect you with local HUD-approved counselors who will advise you on finding new housing. If you have an Apple device, you can also download the free “HUD Counselor Locator App” to find helpful information.
Dealing with the credit fallout
Once a homeowner defaults on their mortgage, other creditors consider it much more likely they won’t collect what they’re owed either.
With credit cards or car loans, “there may be lenders who will work with you, but you’ll be faced with higher interest rates, higher fees and costlier loans,” says McClary.
Rebuilding credit can be done, but the process takes time.
It’s best to take action right away, starting with getting familiar with your credit report. You can get a free copy of your credit report from each of the three credit bureaus once a year from annualcreditreport.com. Start monitoring your file regularly to track your progress.
Establishing a consistent history of on-time bill payments is the key to raising your credit score over time.
“You might have to bite the bullet and accept the high interest rates initially,” McClary says.
The best advice is to pay off the balance in full before the due date, so interest doesn’t accrue. “Using your credit card will help improve your credit score over time, if you’re replacing negative activity with positive activity like timely payments,” he says.
Many banks and credit unions offer credit-builder products, such as secured credit cards and secured loans, that are specifically designed to help consumers handle credit responsibly and improve their credit profile.
Buying another home of one’s own
When you want to buy a new home after dealing with a foreclosure, there is generally a mandatory waiting period before you can get approved for a mortgage. The length of time required by Fannie Mae for a conventional mortgage is seven years. But you may be able to get a new mortgage sooner than that, depending on your circumstances and the type of mortgage you want.
Fannie Mae guidelines allow a shortened waiting period of just three years, provided you can document that the foreclosure was due to extenuating circumstances — meaning events that were beyond your control and not likely to happen again. Examples include a sudden job loss, large medical bills or a death in the family resulting in loss of income.
With the three-year waiting period, there are more stringent requirements for getting a mortgage, including a larger down payment.
However, if you’re buying a vacation home or rental property, the waiting period remains seven years, regardless of extenuating circumstances.
An FHA loan may be a better option for obtaining a mortgage after a foreclosure. The minimum time between the completion of foreclosure until when you can be approved for a FHA loan is three years. If you can document extenuating circumstances that were beyond your control, you may be able to request an even shorter waiting period for an FHA loan. Still, FHA borrowers will have to show that they’ve been practicing good bill-paying habits since the foreclosure.
There is a surprising silver lining for homeowners who have gone through having mortgage debt discharged through bankruptcy. The waiting period for a new loan after such a process is actually shorter than with a foreclosure. Fannie Mae guidelines allow mortgage lenders to approve new mortgages after a waiting period of just four years (or two, with extenuating circumstances), rather than seven years.
What to tell a potential employer
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.
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.
Employers can see from your credit file that you went through foreclosure.
“The best thing you can do is be proactive,” McClary says. “Let them know about the foreclosure before they find out on their own. Be honest. Let them know what happened and what you’re striving to do to move beyond it and turn your financial situation around.”
Getting hit with a surprise 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 unable to recover from the sale of the property.
Any time debt is forgiven, it’s a potentially taxable event. You are not paying back the money that you borrowed, so that money is considered income by the IRS.
However, there are some exceptions. Foreclosure victims may still not have to pay a tax tab. 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.
What to do next
The emotional toll of leaving a home and neighborhood are impossible to quantify for families.
The foreclosure process is enormously stressful and can sometimes strain family relationships. As you deal with the fallout from a foreclosure, remember to encourage family members to express their feelings and frustrations about the experience. Keeping communication open will help set the stage for a fresh start in the next stage of your lives.
A final tip: Once the dust has settled, it’s worth getting back in touch with the trustee named on your foreclosure papers, or the court that handled your foreclosure proceedings, and making sure they have your new contact information. While you may want to put the whole episode behind you, there’s a small chance that there’s money left over from the foreclosure sale that’s supposed to go to you.
Foreclosure rules vary by state and county, but if the house ended up being auctioned, there’s the possibility that the winning bidder paid more than the amount of the defaulted debt due to the bank. In most states, any surplus then would go to the former owner.
If your foreclosure was handled by a court, you can provide your case number and ask them to check whether there was any balance left. If it was handled by a bank trustee, you can ask for a report detailing how the funds from the sale were distributed to the lender or any lienholders, and whether there was any money left over that is due to the former owner.
- Missing payments? Here’s how to avoid foreclosure
- How to know when to refinance your mortgage
- Five tips for buying a foreclosed home