Due to the housing crisis, more homeowners than ever are turning to foreclosure. However, this time there’s a twist. Not too long ago, foreclosure was only a process forced onto homeowners by banks as a punishment for missing payments.
Today, homeowners are choosing to walk away from their homes, and enter willingly into foreclosure.
While foreclosure has a bad rap and should be taken seriously, it isn’t the horror story it’s made out to be.
For some homeowners, it actually might be a wise financial choice. If you find yourself struggling to make your mortgage payments or you are underwater in your home, consider the following.
There’s a lot of loan programs out there. From government programs like USDA loans direct, USDA home loans, or FHA backed programs, to the mess of lending options from banks, it can be hard for home buyers to successfully navigate the process.
Thankfully, since the housing crisis, the widespread practice of lenders offering predatory loans has been brought into the light. To trick them into loans more favorable for the bank, many homeowners were deceived about the terms of their loan, steered into loans with exceptionally high interest rates, or forced into multiple refinances.
Take a close look at the terms of your home’s mortgage. You may find that you might not have a chance at every digging out.
Your Credit will Recover
The notion that your credit is forever ruined by foreclosure is false. True, it does take years for your credit score to recover, but eventually, it can be done if you make wise financial choices in the meantime.
You will need to be prepared to have a hard time getting loans, renting an apartment, or even getting a cell phone plan until it does. Get your most important payments taken care of before you decide to go this route.
You can Move on With Your Life
Thanks to the housing crisis, many homeowners are stuck with mortgages they cannot afford, in a home that’s currently underwater, and all with interest rates that might still be rising.
Sure, a number of banks have programs designed to help homeowners out, but this doesn’t guarantee you a solution.
While foreclosure shouldn’t be taken lightly, it can be a way out of a hopeless situation. Consider, which will take longer to turn around, your current situation with your home, or your credit recovery after a foreclosure. You may find that foreclosure is the faster situation.
Benefits Of Bankruptcy In Foreclosure Proceedings
Personal bankruptcy is often characterized as a last resort option for people who are down on their luck. It’s certainly not something that most people would proudly admit to their friends and family, and, yet, it can be a viable option for ending foreclosure proceedings in California (among other states).
Even though a social stigma persists about bankruptcy, it doesn’t necessarily mean that you’re flat broke and out of work. In fact, in order for bankruptcy to work in a foreclosure case, it’s absolutely better to have ongoing and stable income flows. Of course, you may be wondering how exactly this works.
First of all, you have to be in arrears on your mortgage payments enough to make the bank or other lending institution pursue foreclosure on your home. You usually have to be delinquent on your payments for a few months in order for the bank to pursue you.
Obviously, it’s in your best interest to try and avoid foreclosure for as long as possible. Try working out a deal with your bank that allows you to make the payments later. If your goal is to save your home, then entering into foreclosure makes it much more difficult to accomplish.
Even so, sometimes foreclosure is unavoidable. In California, foreclosure proceedings are often longer and more laborious than in other states. There are laws in place that are meant to protect homeowners from predatory lenders, but if you’ve defaulted on a valid loan, then you may be in for a long ride.
Going into foreclosure means that you won’t have to pay any property taxes or other payments on your house, at least for the time being. You may be sacked with legal fees and other charges later on, but being in foreclosure means that you don’t necessarily have to make any payments (although you still can if you want).
If you feel as if the bank is closing in on the seizure of your home, then one of your only options in this instance is to declare bankruptcy. By declaring bankruptcy, you effectively bring the foreclosure proceedings to a standstill. The bank cannot ask for your money and you can live at least marginally peacefully for a few months.
Of course, bankruptcy isn’t a cure-all. It’s more of a stopgap measure that only works if you have the income to make it work. If you can scrounge up the cash during the bankruptcy, then you can pay off your debts and continue living in your own home.
Obviously, there’s a negative side to bankruptcy as well. If you do not have ongoing income that can help you make your mortgage payments, then you’re really just delaying the inevitable.
You’ll be able to live in your home for another 3 or 4 months, but, without the money, you won’t be able to stay much longer.
In any event, bankruptcy can provide you with a much-needed respite and the time to accumulate money to save your home. If you value your home, then there may be no other option.
Consequences of a Foreclosure on Income Tax
A lender may initiate foreclosure proceedings against you if you fail to meet your monthly mortgage dues. The lender will dispose of the home at a foreclosure auction. If the price obtained for the home does not pay off the principal balance of the mortgage your lender might cancel the debt.
The Internal Revenue Service (IRS) however, could impose a tax on the canceled debt. There are other taxes-related inconveniences for homeowners coping with foreclosure. Here are the consequences of a foreclosure on tax issues that you should be aware of before you allow a lender to foreclose on your property.
Debt Cancellation by Lender
If you borrow money from a lender and are unable to repay the amount, the lender may forgive the amount on request. You will have to declare the canceled amount in your income in most circumstances for the purpose of calculation of income tax. Income tax laws require the lender to report the amount waived to the IRS.
Tax Relief on Cancelled Debt
The IRS regards most debts canceled by a lender as taxable. In case of mortgage loans, the Debt Relief Act of 2007 allows tax exemptions on canceled debts for purchase and home improvement mortgages for primary residences. Mortgages are taken out for second homes, rental properties and vacation homes may not be eligible for debt relief.
Initially, the Debt Relief Act covered homeowners for the period between 2007 and 2012. The Congress reauthorized it for 2013. It is not certain if the Act will be effective beyond 2013. A homeowner with a mortgage balance higher than the worth of the home should discuss with the lender about all available options.
Other Exceptions to Taxes on Debt Cancellation
Certain other kinds of canceled debts are tax exempt, as well. In certain situations, the IRS may not impose taxes on a debt canceled by a lender. If you file for Chapter 7, 11 and 13 bankruptcies, you may be exempt from taxes on debt cancellation through foreclosure of your property. You will need to complete IRS Forms 982 and 1040, citing all the details regarding the tax exclusion.
Tax on Foreclosure Profit
If you can dispose of a rental or vacation property or a second home at a foreclosure auction at a profit, the IRS may tax you on the amount of profit. A profit on a sale of your primary home is exempt from tax, however.
Drawbacks of Deed Instead Of Foreclosure
As against a general belief that a deed instead of foreclosure is beneficial for customers, it is in actually a blessing in disguise for the bank. Most sellers, who do not have equity in their kitty, are the ones at a major disadvantage. Most buyers in a dilemma opt for deed instead when banks reject their loan modification or their short sale.
What Is Deed in Lieu
It is generally a transfer document for transferring the title of the property from the homeowner to the lender or a bank. This is done in front of a notary and recorded legally in records. It involves signing a deed between the homeowner and the bank.
Why a Bank May Reject Deed Instead Of Foreclosure
It is commonly believed that a deed in lieu can only be signed for a property under foreclosure. However, a lender may not have filed a legal proceeding for foreclosure, but there is an option to start a discussion on a deed in lieu.
The banks are reluctant to enter in the deed with a current customer. There are many other reasons like this, which may involve a rejection of a deed in lieu.
If a bank committee, finds the deed to be unprofitable or offers minimal profit to the bank and the bank has a better opportunity, it reduces the keenness, and hence, the bank may reject it.
Another factor could be if there is any subsequent lieu against a property, it comes on to the lender, which in this case, is the bank. Hence, the bank has full rights to reject the deed in lieu of foreclosure.
What Are the Drawbacks of Deed In Lieu Of Foreclosure
It is advisable to seek legal advice before entering into the deed. One should remember that a bank is interested to obtain the deed from you, and you do not have any compulsion to abide by the same. A deed may have certain negative effects on your loan.
It is surely going to affect your credit report and may be identical to full foreclosure. Additionally, many agencies would not accept a mortgage application from an individual who has just signed a deed in lieu of foreclosure.
In many cases, a cooling down period of four years is mandatory. A borrower should also ensure that the deed should give him release from all the liabilities and leave no strings attached.
Dreadful Prospects of Losing Home through Mortgage Foreclosure
Millions of people in the country were happy to own homes of their liking when finance was made available by way of home-mortgage loans. These were offered with very easy terms for repayment. When things were normal, borrowers did not have trouble in keeping up the payment of installments due, against the loans, by appointed dates.
The economic turmoil in the country has thrown all those involved in the home building activity into a state of fear and insecurity. Lenders want their money back from defaulters and take legal steps such as foreclosures.
Those who lost their jobs were the worst affected in this situation. Even others have experienced the pressure due to reduced incomes, and consequent difficulty in meeting the commitments regarding payment of mortgage installments.
Thousands have defaulted, and their first thought is to avoid foreclosure by whatever means possible. There are several options open to them depending on the conditions of the loan.
If the problem is of a temporary nature, avoiding foreclosure is recommended. If there is no solution to the financial situation, it is best for the borrower to accept it and close the matter.
Those who feel that they will be able to make payments in a short while can contact the lenders, and renegotiate the terms on mutually agreeable plans. These plans may result in reducing the installment amounts to manageable limits. The lender may also agree to the temporary suspension of payments.
There are experts and counselors in the mortgage field who have full knowledge about the legal implications of defaulting on mortgage repayments. Credit counselors, who have experienced problems relating to debt, can give professional advice to borrowers.
These experts consider legal implications as the foremost. They try to get the lenders not to resort to taking legal actions against the borrowers. Credit counselors, being in the field for quite some time, are in constant touch with the lenders, which is useful when negotiations take place.
Foreclosure has the potential to shatter the dreams of any homeowner. It can happen only through legal action, and therefore, the borrower has to take all the steps to see that the lender does not go to the court.
After a careful reassessment of his financial capability, it is best for the borrower to get the terms of the mortgage loan modified, so that he can start repayment of installments, avoiding foreclosure.
Read also: How to Avoid Foreclosure and Keep Your Home