Recently, foreclosures have been reported to be at their lowest levels since December 2006. In fact, as of December 2013, foreclosures were down 37 percent from prior year, as reported by RealtyTrac, online marketer of foreclosed properties, and CNN Money. That’s good news! But we all know “foreclosure” to be a negative event. So, what does a foreclosure really mean for you, immediately and down the road?
Credit rates spike
Be prepared to see your credit rates spike post-foreclosure. It goes without saying that other creditors may feel uneasy about whether they will collect what you owe them. Be prepared to struggle with not only credit cards, but car loans and other purchases. If the foreclosure was your only major screw up, you may be able to recover to a decent credit score after 24 months. However, if it was just one fallout among many, you may never be able to fully recover.
Challenges of buying another home
Dreaming of buying another home? Be prepared to wait a minimum of five years, if not seven. And be ready to show that you are timely with your bill paying and are exercising good financial habits in general. If you can prove that your foreclosure was due to extenuating circumstances (such as a severe injury or illness), you may be able to cut this time down to three years.
After a foreclosure, there’s also a chance you may have to explain the event to a hiring company. Companies may perform background and credit checks as a standard part of their hiring process. Plus, if you’re in a position to handle money or deal with anything financial related at your job, it could be even more likely that they question your judgment due to the foreclosure.
Just because you’ve walked away from the home, doesn’t mean you’ve escaped all the bills. You may be ridding yourself from the burden of a mortgage payment, but the IRS may view your forgiven payment as a gift, thus taxable income. Additionally, you may be liable for capital gains taxes due to the sale of your home. Though it’s not a sale in the traditional sense, the IRS views it as a sale under the tax code. You’ll want to discuss your mortgage and cancellation-of-debt income with a tax professional to see how your unique situation is impacted.
Walking away from your home and neighborhood that you may have lived in for many years — and created a lot of memories in — can be a psychological battle. It can be daunting to come to terms with your new financial situation, or you may be feeling sadness, shame or embarrassment. One small upside here is that because foreclosures have become so common, especially in recent years, you may find people to be a lot more understanding.