Life After Foreclosure: What To Expect

I am sharing a 2-part blog today and tomorrow regarding the impact on people going through foreclosure. Today will be about what you need to know and tomorrow will be about rebuilding your life and your credit.

Going through a foreclosure is stressful enough, but once it is final the turmoil... both financial and emotional... is far from over. There is a 5-year and 7-year benchmark where various rules apply that determine how to press forward. According to Fannie Mae, in their Guidelines Regarding Bankruptcy and Foreclosure, certain timelines take effect.

• A 5-year elapsed time period from completion of foreclosure is now required to reestablish credit. This has increased from 4 years to deter what Fannie Mae sees as "reckless debt decisions."
• The purchase of a principal residence is allowed with a 10% down payment and a minimum credit score of 680.
• Purchase of a second home or investment property is not.

Finding a new home can be a challenge. A homeowner's credit score will see the impact of a foreclosure for 7 years, although the impact will lessen over time. If you are looking to rent, the credit report will reflect the foreclosure. We have found that putting together a resume of sorts that explains why the foreclosure happened (or any other credit problems). Having cash for a larger deposit will help, as well as building to a minimum credit score of 580. Making plans early is critical to navigating through this time.

Creditors are also watching consumer credit history and credit cards have a "default rate" that could result in rates jumping to as much as 30%. Getting a car loan or any other advance from a lending institution will most likely also be impacted.

Getting hit with a tax bill can really be a burden. If you lose your home, a tax bill can still arrive for taxes on the amount of the mortgage the lender was not able to recover from the sale of the property. (Whenever debt is forgiven, it is a taxable event which the IRS sees as income.)

Exceptions can be filed if a foreclosure is an isolated event as a result of extenuating circumstances ( a long history of good credit and a solid job). In that case, credit can be reestablished in as short a time as 24 months.

With the record-breaking foreclosure statistics, the number of foreclosures may lessen the stigma. There are a multitude of advisers with tips on coping with stress, which bill to pay first, what to tell creditors, etc. We found one at http://www.ToughTimes.Illinois.edu that has some good advice.