Record numbers of Georgians are losing their homes to foreclosure, and after the legal process ends, the job of putting your life back together begins. Here are some ideas on what to expect after the worst credit experience of your life.
1. Emotional depression
Losing your home to foreclosure is a devastating experience. It's easy to become emotionally depressed and grow increasingly isolated from friends and even family. This can occur at the very same time you need their support the most.
In this country, we've been raised to believe that anyone who doesn't pay what they owe is a failure and perhaps a criminal. We tend to equate our self-worth with our net worth.
The reality is quite different -- no one thought this recession would drag on this long, and an awful lot of honest, hardworking Americans have lost their jobs. Even so, the foreclosure process can make borrowers feel as if they have been dishonest.
Make sure your emotional support structure is healthy, and that you use this time to strengthen bonds of friendship and family.
2. Where to live next
Your immediate problem is finding a new place to live. While renting your next home may seem an obvious step, be prepared to explain your credit woes to the rental agent.
Because the rental market is tightening, landlords are being more picky about whom they rent to. If you have just experienced foreclosure, plan on a higher security deposit (double is not unusual) and maybe even a higher rent.
A weak credit report causes the landlord to fear late rental payments, and that means more risk for the owner. That perception of higher risk, whether well-founded or not, translates into higher expense for you.
3. Other creditors may pile on
Once you have experienced foreclosure, know that your other creditors will find out about it, and likely raise your interest rates to the maximum rate they are allowed by law. If you are carrying large balances on credit cards, the increase in interest expense can be hard to bear. Some cards can go as high as 30 percent annual interest rate. In addition, it will be hard to obtain any new credit for a while, even a car loan.
4. Employment
Many employers monitor their employees' credit reports on an annual basis, to watch for major lifestyle changes and unexpected problems.
Don't be surprised if your boss asks for an explanation of why the foreclosure occurred, even though it's probably none of his or her business. This is a particular problem if you are applying for a job in financial services, so it's smart to anticipate the question and have a plausible reason for losing your home.
5. Watch out for a tax bill
If you are upside-down on your mortgage loan, and the lender forecloses, the lender will eventually sell the house for whatever it can get. The difference between what you owed and what the lender recovers is called the deficiency, and in Georgia, lenders can choose to pursue you for that debt provided they jump through certain legal hoops.
However, most foreclosing lenders in Georgia don't go to the trouble of "confirming" the foreclosure so they can sue the borrower. They simply charge off the debt and let it go. And while that sounds like a good thing, it can create a new problem with our friends at the Internal Revenue Service.
The IRS says that anytime you are relieved of a debt, that relief is the same as income. And they consider many foreclosures to be relief from a debt. That means you may receive a Form 1099 for miscellaneous income in the amount of the deficiency that was canceled as a result of the foreclosure. Fortunately, Congress passed a law in 2007 that forgives any tax on deficiency cancellation for owner-occupants and those who are insolvent, but you need to talk with your accountant before you lose your house, not afterward.
6. Three years to next house
Under current lending guidelines, the easiest loan to qualify for is the FHA home mortgage. If you begin your path to credit recovery right away, if you pay all your bills as agreed, you will probably be able to get a new home loan in about three years after a foreclosure.
Remember that most loan approvals are driven today by credit scores, and the credit scoring model weights most heavily what you have experienced in the past 12 months. So as time passes, your foreclosure becomes less of an issue. After about three years, it is considered ancient history.
John Adams is an author, broadcaster and investor. He answers real estate questions submitted through his website and in this column. For more real estate information or to make a comment, visit www.money99.com.
