Are You at Risk of Foreclosure?

A foreclosure can have many consequences aside from losing your home:

1) Ruined Credit Rating - Your credit rating is used by all types of lenders to assess your ability to repay debt, and is the main factor considered when qualifying you for a loan. If a foreclosure appears on your credit report your credit scores will immediately plummet, potentially making it extremely difficult for you to obtain a loan in the future. This can also affect your ability to qualify as a renter or apply for certain jobs. Additionally, if you have no positive mortgage history following the foreclosure, you will appear to be a very high risk to a mortgage lender, making it more difficult for you to become a homeowner again.

2) Extra Taxes - If your lender sells your home and the sales price does not cover the entire amount that you owe, the lender may forgive the difference and report this as a loss on their taxes. This is called a discharge of debt, and the IRS may fully tax it as part of your personal income. The same applies to a short sale, where the lender agrees to accept less than the full amount owed. If you sell the property at a profit, you may have to pay capital gains taxes.

3) Debt Burden - If you are facing foreclosure, and your lender thinks that the sale price of the house may not cover what you owe on your mortgage, the lender may elect a judicial foreclosure. In a judicial foreclosure, the lender may seek a deficiency judgment against you to cover the shortfall. The judgment itself comes from the county courthouse and could have consequences, such as garnishment of your earnings.

Foreclosure Warning Signs

It's possible to be at risk of foreclosure and not realize it. It's important for you to know your risk level, so you can take preventive measures. Review the risk factors listed here to see how many, if any, apply to you.

• Falling home values - Is the real estate bubble starting to burst in your area? When prices are rising as fast as they have in recent years, homeowners in danger of defaulting have the option of selling, repaying their loan and starting fresh. If price increases are starting to slow in your area, this could be a sign that the market is cooling. Lower home values reduce your ability to get out of debt and/or stop foreclosure by selling. In extreme cases, you can end up "upside down": owning more on your home than you can sell it for.
• Low credit scores - How was your credit when you applied for your mortgage or to refinance? If your FICO (Fair, Isaac & Co.) scores, which lenders use to assess you as a loan risk, were too low, you may have gotten a "sub-prime" loan, which carries a higher rate, increasing your payments. Also beware of adjustable rate loans with balloon payments; as interest rates rise, these can become a burden. Review your loan documents carefully.
• Uncertain employment - Unemployment levels tend to fluctuate with the economy, but if you're in a particularly volatile segment of the workforce (such as education or the public sector, which is susceptible to government budget cuts), you need to be hyper-aware of your employment status. A sudden layoff is one of the most common causes of foreclosure.
• High debt - When you apply for a loan, the lender will check to make sure that your projected mortgage payment and transportation expenses (car payments) don't exceed a certain percentage of your total income (usually around 36%). This is intended to make sure you have a cushion to cover life's other expenses. But what about credit card debt or student loans? A heavy consumer debt burden can become a weight around your neck in the event of a sudden job loss.
• Surprise expenses - Medical bills or a critical home repair can wipe out a surplus in an instant. Do you have good health coverage? Have you addressed potential problems with your home such as mold?
• Inflated appraisal - The pressure to close refinancing deals has led to a rash of fraudulent appraisals. Here, when a lender offers you a great refi deal to lower your mortgage payments and consolidate debts, your home must appraise higher to cover all the costs. So a cooperative appraiser simply ups the value of your home. This is illegal, but you're now "upside down" on a loan that doesn't reflect the value of your home. Ask yourself: did your appraisal seem overly optimistic? Did your refinance lender insist on providing the appraiser?