Foreclosure Facts

If you have recently lost your home or are on the verge, there are some hard facts that you will have to face regarding your foreclosure; but, knowing is half the battle. This article will focus on some of the unavoidable ramifications of foreclosure.

30 days past due

Missing even one payment could spell trouble. Even though your lender may not contact you until you have missed two payments, they will report the first missed payment to the bureaus. Even one 30-day late can drastically reduce your credit score. Each late pay that is reported drags your score down even more, which only further complicates your already perilous financial condition. And for every missed payment lenders will usually tack on a 5% late fee.

90 days to 12 months past due

After 90 days of missed payments the lender will usually file a "notice of default" and send you a letter stating the foreclosure process will begin unless you make up the missing payments. Most lenders will file at the 90 mark to let you know they mean business; however, there are other lenders who may delay the process up to a year. The later you get the letter means the more money you owe due to accrued missed payments, exponential interest and extra fees to cover legal costs. But regardless of when you get the letter, you are now in treacherous territory and your options have been significantly reduced. For instance, your chances of refinancing aren't likely now that the notice of default has been reported to the bureaus.

90 days beyond the notice of default

From the notice of default, homeowners normally have 90 days to make up missed payments before the lender will send out a "notice of sale"; which means the house will be placed on the market within the next 15 to 30 days. You may be able to negotiate with your lender to cancel the sale if you agree to make the missing payments along with any late fees and legal charges. Other lenders may refuse to work with you and will insist that you refinance with another lender to make up missed payments if you want to keep the house. But finding a lender who will refinance you is going to be very difficult and time is short; however, it has been known to happen. You may also be able to delay the foreclosure by filing a lawsuit or bankruptcy. You'll still have to come up with a payment plan to make up for the money you owe, but you may be able to buy yourself a little time.

Contacting your lender

It is advised that you contact your lender as soon as you know you'll have trouble making a payment. The sooner you call the more likely the lender will be willing to work out a solution with you. They may also be willing to delay reporting any adverse information to the bureaus.

Some of the more common solutions that your lender may offer are:

Temporarily reducing or waiving payments
Setting up a short-term payment plan to help you make up for missed payments
Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
You may be eligible for specific types of loans. For instance; if you have an FHA loan, you may qualify for an interest-free and payment-free loan to get your mortgage current. You are not required to pay the money back until you pay off the mortgage or sell the house.

There are a couple of things to consider when contacting your lender.

You need to discuss options with the right people

The "loss mitigation' department is who will be able to provide the best solutions. However, you may find it difficult to get passed on to loss mitigation until you are several months behind on your payments. Until then, the lender will generally pass you on to the collections department whose only option is pay your bill now. But, with enough persistence you can usually talk to the people you need to; just stand your ground.

You need to be prepared to make the payments

If the lender's re-payment solution is acceptable to you and you agree on it, you need to uphold your end of the bargain. If you default on the repayment plan, there is little chance of negotiation. The lender will initiate the foreclosure process.

Finding a new place to call home

Buying a home

Should your attempts to keep your home fail, you will need to find new living quarters. To help cushion the blow of your loss, it might make you feel a little better to know that most victims of foreclosure will eventually become homeowners again. Although it will probably take some time, especially with Fannie Mae, the leader in mortgage guidelines, lengthening the time that must pass between foreclosure and approval for a new mortgage. The standard waiting period was four years, but Fannie Mae has now increased it an additional year, making it five. If foreclosed owners can explain that their reasons for default were beyond their control - like losing their job or a debilitating illness - the waiting period may be reduced to three years.

There is also an exception to the five-year period if consumers want to apply for a federally insured FHA loan. If potential FHA borrowers can demonstrate that they have been making sound financial decisions and have been making consistent payments on their debts, the minimum time between the completion of foreclosure until the time you can be approved for an FHA loan is three years - and you don't have to prove any extenuating circumstances that led to the foreclosure.

Another critical factor that could also delay your future home purchase is the condition of your credit. A foreclosure is one of the worst things that can happen to your credit status and it's going to take some time to re-build your score and get a bank to take a risk on you again. With a little patience and diligence you can make it happen.

Since purchasing probably won't be an option any time soon, you are either looking at renting or moving in with family or friends.

Renting

You will need to come up with a security deposit, which is often first and last month's rent. This will not be easy to do since you've likely been scraping together funds to cover your mortgage the last few months. Any emergency reserves you had probably got used in attempts to cover your house payment. If you know you are on the brink of losing your home, try to come up with as much cash as possible to put towards a security deposit. That may mean putting off paying other debts for a couple of months. Yes, you will be charged late fees and your rates may increase, but right now you need a roof over your head and you'll need some cash to get it. You can work on your credit after you get into your new place.

Speaking of credit, however, there is the issue of credit checks most landlords conduct before they will rent. A foreclosure doesn't look very promising and a landlord may refuse renting to you. Then again, with so many former homeowners in the same boat, perhaps landlords are willing to make some accommodations. If you can provide a solid job history and steady income, your chances of getting accepted are good.

Tax Bill

Another issue that foreclosed owners are typically unaware of and unprepared for is the tax bill they will get hit with after the lender sells the repossessed property. Creditors don't just forgive debts out of the goodness of their hearts. When creditors get shafted, they will claim any unpaid amount to the IRS as a loss and get a write-off. The creditor will then send you a 1099c tax form to let you know they have reported the loss to the IRS. The IRS will then come after you. Whatever debt you have had forgiven is considered income on which you should pay income tax.

There is a way to fight this tax debt and that is to file for insolvency with Tax Form 982. After all, the reason you couldn't pay your mortgage and your home was repossessed is because you couldn't afford the payments - hence, you were insolvent at the time of the foreclosure. Just be sure you have the necessary documents to provide proof.

There is also one other exception to the rule. With the surge in foreclosures, Congress has recently passed a law giving relief to foreclosed owners. The Mortgage Forgiveness Debt relief Act of 2007 states that taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualify for this relief. Tax-free treatment is also available to people who restructured their mortgages for a lower balance.

Some stipulations do apply, such as: the home must have been used as the main home, or in other words the principal place of residence for the debtor. Second homes and rental properties do not qualify for the tax exemption. In addition, the debt must have been used to buy, build or make substantial improvements to the residence. If you qualify for this tax relief, you will need to use Form 982 to report the cancelled debt. Even if you don't qualify, you can still use Form 982 to report insolvency (as outlined above).

The foreclosure process is complicated, time consuming and financially and emotionally stressful and should be avoided at all possible costs. However, if foreclosure is inevitable, it is not the end of the world. And, for some consolation, at least you are not alone. With so many homeowners in the same boat as you are, there is less of a stigma associated with foreclosure. It used to be that foreclosed owners were looked at as irresponsible and reckless, now they are looked at as victims of the recession and unethical mortgage practices. Being aware of some of the issues that are associated with foreclosure should make you better equipped to get through the loss and help you begin to re-build.