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Foreclosure is the legal procedure through which a lender takes
ownership of a property they have financed from the borrower who is in default of
payment.
Besides the obvious fact that a home owner will lose his or her place to live, there
are other ramifications that will affect someone facing foreclosure including emotional
and financial burdens:
- Losing the home. Foreclosure is a very difficult and
emotionally-troubling process for homeowners and their families. It comes atop of
already existing financial and other problems and has long lasting effects for years
to come.
- Losing all saved equity and appreciation in the home.
Homes increase in value each year (in most cases). The longer a person lives in
a home, the more the home's value increases. In many cases the combination of the
equity and appreciation can translate into the home owner losing a significant portion
of life savings.
- Increased taxes. A lender that loses money from the
sale of a foreclosed home must report the loss to the IRS. Subsequently, the IRS
may require the previous owner to report the lender's loss as income on his or her
next tax return and pay taxes on it.
- Inability to borrow money in the future. The most
serious consequence facing a home owner is the immediate destruction of credit profile.
A foreclosure is a serious derogatory item that will label a person as unworthy
for credit. It will remains on the credit report for at least 7 years.
- Inability to buy a new house for a long time. Current
lending guidelines restrict lenders from providing new mortgages to anybody with
foreclosure within 24 – 36 months.
- Difficulty to rent an apartment. Landlords are routinely
checking credit history for all applicants and have significant restrictions for
everybody with bad credit. They could have policies of outright denial of rent or
demand significant cash deposits as well as increase in rental fees.
- Lawsuits. In many states lender has rights to recover
part of the loan that was not repaid by the sale of the property at a public foreclosure
sale. When there is a deficient amount realized from a foreclosure sale, the lender
can sue the borrower and get a deficiency judgment against all other assets of the
borrower, causing the borrower to be personally responsible for repayment of the
loan.
- Loss of employment, difficulties to find another job.
Some employers require their employees to maintain good credit histories. Notification
of a foreclosure may be grounds for an employer to fire the person from his or her
job.
- Increase in insurance premium rates. Insurance companies
are routinely use credit scores to calculate their risks (regardless of insurance
type – including auto, life, health, etc). Statistically, people who have a poor
insurance score are more likely to file a claim resulting in higher insurance premium.
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