Are Foreclosures a Good Option for You?

Maybe not so much.  With the persistently slow economy, now in its 5th year, millions of homes are foreclosures.  Some think that letting a house foreclose is a good strategy, especially if a house is under water or a family simply doesn’t have the money.  Let the house be the lender’s problem, right?

Then again, perhaps not the best idea…

In a recent article on Investopedia.com, letting a house go into foreclosure has negative long-term ramifications.  Even short sales can cause significant credit score risk.

According to the article:

Is Foreclosure Ever a Good Idea?

By Shirley Pulawski

“Over the last few years, since the crash of the housing bubble and in this troubled economy, many homeowners have homes worth significantly less than what they paid, greatly diminished incomes, and other issues. Foreclosing on a home has major ramifications that can last for years, but for some, foreclosure may seem like the only option. Here, we take a look at some of the details and alternatives.

Many Americans bought homes during the housing bubble which are now worth much, much less than the asking price at the time. There are many reasons home prices have fallen, resulting in underwater mortgages. As an example, entire neighborhoods were built in a booming frenzy by construction companies during the bubble. In some of these areas, the construction created a glut of housing, and many houses stayed vacant. The homeowners who bought into these ghost towns are faced with empty neighborhoods and homes valued at far less than what they owe. Other more established neighborhoods emptied out as homeowners defaulted on sub-prime mortgages, causing homes in the entire neighborhood to fall in value. The homes are hard to sell, even at a loss, and can be just as hard to rent out to others.

And it’s no secret that incomes around the country have dropped. Most everyone knows someone who has lost a job and taken a pay cut upon returning to work. Mortgage payments which were easy to meet under better wages have now become increasingly harder to pay, and many homeowners are finding themselves struggling to stay on top of the bills.

So, while some bought homes they couldn’t quite afford, lured by low interest rates and all-too-willing, unscrupulous lenders and they ended up in default. However, for many Americans, home purchases that seemed like a wise investment at the time have turned into financial disasters. Many are wondering what to do next with a mortgage that is too high, homes that won’t sell for enough to pay for the mortgage, or homes which are simply unlikely to sell at all.

Foreclosure is one way out of the game, but with steep implications. It can completely destroy one’s credit rating for years to come, and make it difficult to get a needed loan later on. It could hurt a family’s chance of renting if a credit report is part of the applicant screening process, thereby limiting rental options. Any open lines of credit may be lowered once the default goes on record, and some credit card companies may change other terms. Further, there can be steep tax implications come April 15.” (1)

Some homeowners facing foreclosure might consider a short sales instead.  But according the article, short sales have their own risk.
“An alternative to foreclosure is a short sale, although the negative impact to credit scores can be just as bad as a foreclosure on record. A short sale is an agreement with the bank to sell the house for less than what is owed, and the homeowner can be allowed to walk away with minimal cost, or given terms to pay back the deficiency which the homeowner can more easily handle financially.”

With neither of these as a good option, what can a homeowner do?  A few options are available.

– Work out terms with the bank or lender.  They don’t want to be stuck with the property anyway.

– Earn more money by working a second job, maybe even part-time from home.  Homepreneurs has many work from home jobs listed in our work from home section.

– Consider roommates or renting out the garage for storage

– Move in with family or friends for a while and rent out the existing home

In all cases, talk with a real estate attorney, financial planner, and realtor.  Each can help you to find the appropriate solution.

Reference

(1) http://www.investopedia.com/articles/my-bank-tracker/personal-finance/102813/foreclosure-ever-good-idea.asp