What Are My Options If I Was Once in Foreclosure?

A foreclosure affects your life for years to come.

Walking away from a mortgage has its consequences. Even after a foreclosure, the lender and the tax man can still come after you for money. You also have fewer financial options because of your poor credit. If the situation becomes serious enough, you may even have to declare bankruptcy.

Deficiency

After the lender forecloses the property and sells it, it may still not have enough money to cover your outstanding debt. Depending on the laws in your state, your lender may come after you for the deficiency, which is the difference between the sale proceeds and your outstanding debt. If you don't have enough money to pay off the outstanding debt, your lender may sue you and you may have to declare bankruptcy.

Tax

The canceled mortgage debt that you don't have to pay may count as taxable income. If so, the Internal Revenue Service (IRS) may send you a bill for the taxes on the canceled debt, which includes the outstanding balance, penalties and late fees on your mortgage loan. Depending on your particular case, you may be able to negotiate lower payments with the IRS. Otherwise, a bankruptcy or a claim of insolvency can eliminate the tax.

Credit

After a foreclosure, your credit score drops. Potential lenders, employers and landlords may check your credit reports, so poor credit makes it more difficult for you to get a loan, employment and shelter. The foreclosure stays on your credit report for about seven years. During this period, you can build your credit by paying your bills on time and meeting all your debt obligations.

Home Buying

The extent to which the foreclosure affects your future home purchases depends on the causes of the loan default. If you can't afford your mortgage payments because of economic problems, such as unemployment or divorce, you can usually buy a home after waiting for two to five years. If you walk away from your mortgage just because of a decline in the property price, you may have to wait for seven to eight years. You also may have to make a down payment of 30 percent or more.

References

• Money Central: Lose Your House, Then Get Sued
• The New York Times: After Foreclosure, a Big Tax Bill from the IRS
• CNN Money: After Foreclosure: How Long Until You Can Buy Again?