Foreclosure is a significant financial event that can have lasting consequences, including its impact on your credit report. But just how long does a foreclosure stay on your credit report, and what does it mean for your financial future? Let’s delve into the details:
How Long Does Foreclosure Stay on Your Credit Report?
Foreclosure remains on your credit report for seven years from the date of the initial missed payment that led to the foreclosure. This means that even after the foreclosure process is completed and the property is sold, the negative mark will continue to affect your creditworthiness for several years.
Understanding the Impact of Foreclosure on Your Credit:
Foreclosure is considered one of the most damaging events for your credit score. It can significantly lower your credit score, making it challenging to qualify for new loans, credit cards, or favorable interest rates. Additionally, lenders may view you as a higher credit risk, leading to potential denials or higher borrowing costs.
How Does Foreclosure Compare to Other Negative Items?
While foreclosure is a severe negative mark on your credit report, its impact may lessen over time, especially if you take steps to rebuild your credit. Compared to other negative items like late payments, collections, or bankruptcies, foreclosure typically has a more prolonged effect on your credit score.
Rebuilding Your Credit After Foreclosure:
Despite the challenges posed by foreclosure, it’s possible to rebuild your credit over time. Here are some steps you can take to improve your creditworthiness:
Pay Bills on Time: Consistently paying your bills on time is one of the most effective ways to rebuild your credit. Set up automatic payments or reminders to ensure you never miss a due date.
Reduce Debt: Lowering your overall debt burden can improve your credit utilization ratio, a key factor in determining your credit score. Focus on paying down existing debts and avoiding new debt whenever possible.
Establish Positive Payment History: Opening new credit accounts and using them responsibly can help demonstrate your creditworthiness. Consider applying for a secured credit card or becoming an authorized user on someone else’s account to establish positive payment history.
Monitor Your Credit Report: Regularly review your credit report to check for inaccuracies or discrepancies. Dispute any errors you find to ensure your credit report accurately reflects your financial history.
Conclusion:
While foreclosure can have a significant impact on your credit report, it’s not the end of your financial journey. By understanding how long foreclosure stays on your credit report and taking proactive steps to rebuild your credit, you can overcome this setback and work towards a brighter financial future. Remember, patience, diligence, and responsible financial habits are key to improving your creditworthiness over time.
A foreclosure rescue scheme takes advantage of vulnerable homeowners who risk the loss of their home through foreclosure.
The “rescue” involves a manipulated deed process, payment of significant up-front fees, use of a straw buyer/borrower, and false promises that the homeowner may occupy the home as a tenant, during which time the homeowner can get his or her finances in order. The homeowner is also given the right to purchase the home back from perpetrator at an exorbitant price. In the meantime, the perpetrator refinances the property at an inflated value and pockets the equity, commonly referred to as equity-stripping.
The straw buyer who generally received only a modest fee for participating in the fraud subsequently defaults on the loan, and the original homeowner is evicted and loses the home and any remaining equity. There are many variations on the foreclosure rescue scheme. All end up with the same result: The homeowner loses his or her home and generally his or her equity.
Short sales and foreclosures can hurt your credit—here’s how
Credit scores can predict how likely you are to make timely payments, pay off loans, and help a lender understand how “risky” you are as a borrower. Your credit score is based on your lending history and your ability to manage and repay debts as agreed.
Financial slip-ups impact your score, such as failing to make timely payments or letting your mortgage payment slide. If you suffer a short sale or foreclosure, your credit score will suffer too—you’re a potential increased risk for a lender.
If you’re considering a short sale or foreclosure for your home, here’s how much your credit score could drop, how long a foreclosure or short sale will stay on your credit report, and what you can do to reduce the damage.
What Is a Short Sale?
A short sale allows you to sell your home and use the sale proceeds to pay off your mortgage—even if those proceeds don’t amount to the full loan balance. Because lenders often take a financial loss on short sales, this isn’t an option in every situation. You’ll need to reach out to your mortgage lender or servicer directly to inquire if a short sale is possible and any associated requirements.
“Most banks would prefer that a homeowner who has fallen behind on their payments or can no longer afford their home move forward with a short sale,” Yawar Charlie, a Los Angeles-based real estate agent, told The Balance via email. “It is more cost-effective for the lender, and faster.”
A “deficiency” after is the difference between your mortgage and your property’s value. You may be responsible for the deficiency (depending on your state), or your lender may waive this amount, freeing you from responsibility for the difference.
What Is a Foreclosure?
If you fail to make your mortgage payments, you may face foreclosure when the lender seizes your property and sells it to make up for their financial losses. It typically takes four missed payments (after 120 days) to kick off foreclosure proceedings.1
The exact foreclosure process varies by state, but you should receive notice in the mail if a foreclosure is headed your way.
Open and read all letters from your lender or servicer, and consider federal government assistance in avoiding foreclosure.
How a Short Sale Affects a Credit Score
According to Tony Wahl, director of operations at online credit analysis platform Credit Sesame, short sales (as well as foreclosures) should be considered “a last resort.”
“The short sale process is complicated, lengthy, and will have negative ramifications for a homeowner’s credit and finances,” Wahl said in an email to The Balance.
How much can a short sale impact credit, though? Data from the Fair Isaac Corporation (FICO) shows short sales can reduce a consumer’s credit score anywhere from 50 to 160 points, depending on where their credit started. For short sales, the impact is more significant when there’s a deficiency balance.2
The impact is more noticeable for consumers with good credit—meaning a high score or few debts and overdue payments—than someone with an already low score. For example, someone with a higher score could see their credit score drop up to 20% in the worst-case scenarios, while a short-seller with a lower score might only see a 15% drop in the same situation.2
A short sale could stay on your credit history for anywhere between three to seven years.2 However, consumers with a short sale on their record may be able to buy again in just two years in certain circumstances.3
“When it comes time for that consumer to buy a new home, most mortgage lenders will be more lenient with a prior short sale than with a prior foreclosure,” Wahl said.
If you think you’ll buy another home sometime in the future, be sure to get a letter from your lender confirming the short sale, which could help you qualify for a new loan.
How a Foreclosure Affects a Credit Score
Foreclosures have a slightly worse impact on credit score, according to FICO. Depending on their starting score, most homeowners who suffer a foreclosure see their credit scores drop between 85 and 160 points, or about 12% to 20%.2
For example, someone with a “good” starting score of 680 could decrease to between 575 and 595, which is in the “poor” to “fair” score ranges. Someone with a “very good” score of 780 may decrease to between 620 and 640, or the “fair” score range.
A foreclosure can impact a consumer’s credit for up to seven years. Of the 7 million-plus Americans who experienced foreclosure between 2004 and 2015, a little over half still had a credit score rating falling into the “poor” range at the end of 2015.4
Mortgage loan qualification is difficult with a foreclosure on your record, and can mean waiting as much as seven years to buy a new home. A foreclosure won’t be removed from your credit history until seven years after the first missed payment.
Late Payments and Your Credit Score
Late payments have one of the most significant negative impacts on credit score. Late mortgage payments could lead to a double-whammy on your credit score, impacting it long before your short sale or foreclosure happens.
“In both circumstances, the lender will be reporting your late or missed payments,” Charlie said. “Therefore, your credit score will already be negatively impacted—and most late payments take several years to fall off your credit report.”
According to FICO, falling just 30 days behind on your mortgage can result in a credit score drop of up to 110 points. At 90 days, the decrease could go up to 130 points.2
Rebuild Your Credit After a Short Sale or Foreclosure
A short sale or foreclosure doesn’t cause permanent credit damage. Though it takes time, there are ways to improve your score and your future financial options.
According to Wahl, you should aim to make consistent monthly payments on any other debts.
“Remind yourself that this is a long game and will take time,” he said.
In the meantime, you can request help from the National Foundation for Credit Counseling or another nonprofit credit counseling agency. Counselors can walk you through your options for improving your credit and help you toward recovery from your short sale or foreclosure.
Poor credit can make it harder for you to get a mortgage, an apartment, or a credit card. It can also put you on the hook for higher interest rates, which can make the loans and credit lines that you do obtain more expensive to repay.1
If you have fair or bad credit, defined as a FICO score of 669 or below, you may be wondering how to increase your credit score. As hopeless as the situation might seem now, poor credit doesn’t have to last forever. There are steps you can take right now to begin raising your credit score.
Get a Copy of Your Credit Reports
Before you can figure out how to increase your credit score, you have to know what score you’re starting from. Since your credit score is based on the information in your credit report, the first place you should go to improve your credit score is your credit report.2
A credit report is a record of your repayment history, debt, and credit management. It may also contain information about your accounts that have gone to collections and any repossessions or bankruptcies.3
Order copies of your credit reports from each of the three major credit bureaus to identify the accounts that need work. You can get free copies of your credit reports every 12 months from each of the major bureaus through AnnualCreditReport.com.
Dispute Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to an accurate credit report.4 This right allows you to dispute credit report errors by writing to the relevant credit bureau, which must investigate the dispute within 30 days.5
Errors, which can stem from data entry snafus by creditors, easily interchangeable Social Security numbers, birthdays, or addresses, or identity theft, can all hurt your credit score.6
For example, if you already have a history of late payments, an inaccurately reported late payment on the report of someone could have a dramatic and fairly immediate negative impact on your score because late payments represent 35% of your credit score. The sooner you dispute and get errors resolved, the sooner you can start to increase your credit score.7
Avoid New Credit Card Purchases
New credit card purchases will raise your credit utilization rate—a ratio of your credit card balances to their respective credit limits that makes up 30% of your credit score.8 You can calculate it by dividing what you owe by your credit limit. The higher your balances are, the higher your credit utilization is, and the more your credit score may be negatively affected.
Under the FICO score model, it’s best to keep your credit utilization rate below 30%. That is, you should maintain a balance of no more than $3,000 on a credit card with a limit of $10,000.9 To meet that 30% target, pay cash for purchases instead of putting them on your credit card to minimize the impact on your credit utilization rate. Even better, avoid the purchase completely.
Pay off Past-Due Balances
Your payment history makes up 35% of your credit score, which makes it the most important determinant of your credit.8 The further behind you are on your payments, the more it hurts your credit score.
Once you’ve curbed new credit card spending, use the savings to get caught up on your credit card payments before they are charged off (the grantor closed off the account to future use) or sent to a collections agency.10
Do your best to pay outstanding balances in full; the lender will then update the account status to “paid in full,” which will reflect more favorably on your credit than an unpaid account.11 In addition, continuing to carry a balance as you slowly pay off an account over time will subject you to continued finance charges.12
Avoid New Credit Card Applications
As long as you’re in credit repair mode, avoid making any new applications for credit. When do apply for new credit, the lender will often perform a “hard inquiry,” which is a review of your credit that shows up on your credit report and impacts your credit score.13
How many credit accounts you recently opened and the number of hard inquiries you incurred both reflect your level of risk as a borrower, so they make up 10% of your credit score. Opening many accounts over a relatively short period can be a red flag to lenders that a borrower is in dire financial straits, so it can further decrease your score.8 In contrast, having few or no recently opened accounts indicates financial stability, which can boost your credit score.
Leave Accounts Open
It’s rare that closing a credit card will improve your credit score. At the very least, before you close an account, ensure that it won’t negatively affect your credit. You might be tempted to close credit card accounts that have become delinquent (past due), but the outstanding amount due will still up on your credit report until you pay it off. It’s preferable to leave the account open and pay it down every on time each month.14
Even if your card has a zero balance, closing it can still hurt your credit score because credit history length makes up 15% of your credit score. Credit history length factors in the age of your oldest account and most recent account as well as the average age of all accounts. In general, the longer you keep accounts open, the more your credit score will increase.8
Contact Your Creditors
They might be the last people you want to talk to, but you’d be surprised at the help you might receive if you call your credit card issuer. If you’re having trouble, talk to your creditors about your situation.
Many of them have temporary hardship programs that will reduce your monthly payments or interest rate until you can get back on your feet. If you alert them to the possibility that you might miss an upcoming payment, they may even be able to establish a mutually beneficial arrangement.15 These courtesies may allow to make progress in paying down outstanding balances and eventually raising your credit score.
Pay off Debt
Your amount of debt that you’re carrying as a proportion of your overall credit represents 30% of your credit score, so you’ll have to start paying down that debt to raise your credit.82
If you have a positive cash flow, meaning you earn more than you owe, consider two common methods for paying down debt: the debt avalanche method and the debt snowball method. With the avalanche method, you first pay off the credit card with the highest APR with your extra money. Make minimum payments on other cards, and use any leftover funds toward the high-interest card. When you pay off that card, move to the next-highest APR card and repeat.16
The snowball method requires you to make minimum payments on every card, every month. You then use any extra funds to pay down the card with the lowest balance. Once that one is paid off, apply extra money to the card with the next lowest balance, but continue to make minimum payments on the other cards.
If, however, you owe more than you make, you’ll need to get creative about coming up with the extra money you need to pay off your debt. For example, you could drive for a ride-sharing service or sell some things on an online auction website for extra cash. It will take some sacrifice, but the financial freedom and the credit score points you’ll gain will be worth it.
Get Professional Help
If you are overwhelmed by your credit situation or monthly expenses, you live paycheck to paycheck, or are confronting bankruptcy, consumer credit counseling agencies are available to assist you. Certified credit counselors can help you create a budget, put together a debt management plan, and get your finances in order.17
Of course, the key is to find a reputable one. Locate a trustworthy credit counseling agency through the National Foundation for Credit Counseling, the longest-running non-profit organization. Or, locate a credit counselor using the search feature of the U.S. Trustee Program offered through the U.S. Department of Justice. You can always simply refer to your credit card billing statement for a phone number to call if you’re experiencing trouble making your payments.18
Be Patient and Persistent
Patience isn’t a factor that’s used to calculate your credit score, but it’s something you need to have while you’re repairing your credit. Your credit wasn’t damaged overnight, so don’t expect it to improve in that amount of time. Continue monitoring your credit, keeping your spending in check, and paying your debts on time each month, and over time you will see a boost in your credit score.
A short sale is a real estate transaction that occurs when a homeowner sells a property for less than they owe on the mortgage, and the lender approves of the “short” payoff.
Understand what a short sale involves, how it differs from a foreclosure, and its alternatives to decide whether it’s the right approach to get out from under your mortgage.
What Is a Short Sale?
A short sale is any property sale where the proceeds of the sale fall “short” of the original loan amount. It occurs when a seller sells a property for less than the balance of their loan, and the lender agrees to accept less than the amount originally due to them after all costs of the sale.
Short sales are commonly initiated by distressed homeowners who are underwater on their mortgages (the loan balance exceeds the home’s fair market value) and can’t afford or otherwise keep the home but want to avoid foreclosure. But they can also occur if the accepted sale price on a home is higher than the mortgage but not high enough to pay all closing costs and commissions.
In a successful short sale, the lender typically agrees to release the lien on the property in exchange for receiving the loan payoff. It may either forgive the “deficiency” or difference between the original loan balance and payoff or make a plan with the seller to settle the remaining debt.1 In either case, since the lender will be receiving a short payoff in such a transaction, it must agree to grant a short sale, and will generally only do so if it will benefit the lender’s bottom line. If the lender doesn’t view the homeowner or property as a good fit for a short sale, it may disapprove of the sale.
How a Short Sale Works
A legitimate short sale must be an arm’s length transaction involving an unrelated buyer and seller and a bona fide lender.2 The following is an example of how the typical short sale unfolds:
A homeowner has a home that’s worth less than what they owe on the mortgage but must sell it as a result of hardship.
The seller enlists an agent to discuss the short sale proposal (known in short sale terminology as the “short sale package”).
The seller’s agent approaches the lender to assess their willingness to entertain the proposal and identify what the lender requires for a short sale.
The seller works with their agent to price the home and put it up for sale.
A buyer’s agent makes the seller an offer on the property.
The buyer and seller negotiate the offer through their respective agents.
The seller’s agent accepts the offer on the seller’s behalf, and both the buyer and seller sign it, subject to the lender’s approval.
The seller’s agent presents the offer to the lender along with the short sale package including the signed purchase contract, a hardship letter explaining why the seller can’t keep the home, and a narrative about the local market trends that support the short sale.
The lender does a “bottom-line” review of the package and eventually responds with approval, refusal, or, in some cases, no response. If the lender refuses the short sale, they’ll often state the net proceeds that would be acceptable for approval. In the case of approval, the lender sends a short sale approval letter to the seller in order to demand the loan payoff in return for releasing the lien.
Escrow closes, and the proceeds are turned over to the lender, not the seller.3
To ensure that the short sale is an arm’s length transaction, the buyer and seller will generally have to sign affidavits confirming that they aren’t related.
Requirements for a Short Sale
There are four essential ingredients for a short sale, which are generally handled by real estate agents who specialize in short sales:
An underwater home: This means that a home has a fair market value that’s less than the remaining balance on the homeowner’s mortgage.
A seller with a hardship: Most lenders view job losses, surprise medical costs, the homeowner’s death, natural disasters, and military service as acceptable hardships for a short sale, to name a few examples.3 Whatever the hardship, it should serve as a clear impetus for the homeowner to sell “short.”
A willing lender: There’s no point in proceeding if the lender refuses the possibility of a short sale in no uncertain terms, which happens rarely. The lender should at least be willing to entertain a short sale proposal, but the more proactive and committed they are to the seller’s agent’s initial approach, the smoother the transaction is likely to be.
A qualified buyer: Buyers should ideally be prequalified or preapproved, free of excessive contingencies, and flexible with regards to closing.
Lenders generally don’t consider the mere fact that you have an underwater mortgage to be a qualifying hardship for a short sale.
Short Sale vs. Foreclosure
Both short sales and foreclosures provide homeowners with a means to dispose of a property they can’t keep. However, a short sale is a pre-foreclosure transaction that takes place when you sell a home for less than you owe. A foreclosure occurs when a lender repossesses your home after you fail to make the required payments.
A short sale is generally a voluntary, cooperative undertaking with a lender that allows you to settle debts or have them forgiven in order to avoid the more aggressive, and, in some cases, unwanted, act of repossession by the lender in foreclosure. Borrowers prefer them because they may not damage their credit score as much a foreclosure; moreover, they can get back on their feet faster because they can buy a new home in as little as two years after a short sale compared to seven years after a foreclosure.4 Short sales also take less time, up to 10 months compared to the foreclosure timeline of as long as one year.53 Lenders also favor short sales given their lower costs.
Short Sale
Foreclosure
Allows borrowers to settle debts or have them forgiven by lenders
Results in repossession of the borrower’s home
Takes up to 10 months
Takes up to one year
Can have a less negative impact on credit
Can have a more negative impact on credit
Allows you to get a new mortgage within two years
Requires you to wait as long as seven years to get a new mortgage
Alternatives to a Short Sale
If you’re underwater on your mortgage and can’t keep the home, a short sale may seem like the only way to avoid foreclosure. But other foreclosure alternatives may be available to you.
Discuss your situation with your lender to determine whether you’re eligible for a loan modification wherein the lender changes the terms of the existing loan to eliminate the need for a short sale (for example, by reducing the principal), or a mortgage refinancing (replacing it with a new one).
Key Takeaways
A short sale occurs when the proceeds from a real estate transaction fall short of the original loan balance.
It’s often used by homeowners who are underwater on their mortgages and can’t keep the home but want to avoid foreclosure.
The short sale must be an arm’s length transaction between an unrelated buyer and seller, but it’s usually facilitated by real estate agents and must be approved by a lender.
Short sales are preferable to foreclosures because of their less pronounced impact on credit and shorter timeline, but distressed borrowers should also discuss other foreclosure alternatives with lenders.
Get an overview of basic foreclosure terms, steps in a foreclosure, and possible defenses to foreclosure.
If you fall far enough behind in your mortgage payments, you’ll likely lose your home to foreclosure. Foreclosure is the legal process that allows a lender, or the subsequent loan owner, to sell your property to satisfy the debt you owe. (To learn what to do—and what not do—if you’re facing a foreclosure, see Foreclosure Do’s and Don’ts).
Read on to get an overview of the parties and terminology involved in a home loan transaction, find out the general steps in the foreclosure process, and learn about some defenses that might be available to you in a foreclosure.
Home Loan Transactions: Parties Involved
The key parties involved in most home loan transactions and foreclosures are:
The borrower. The borrower is the individual (the homeowner) who borrows money and pledges the home as security to the lender for the loan. The borrower is sometimes called the “mortgagor.”
The lender. The lender originates the loan. Sometimes the lender is called the “mortgagee.”
The investor. An investor buys loans from lenders. (Fannie Mae and Freddie Mac are considered investors.)
The servicer. The servicer—the company you make your monthly payment to—handles the loan account. Often the servicer is a third party that manages the account on behalf of the lender or an investor for a fee. A servicer’s duties include collecting and processing loan payments, as well as initiating and monitoring a foreclosure when a borrower stops making payments.
Home Loan Transactions: Terminology
Buying a home normally involves a large amount of money so it’s common for a buyer to take out a loan, rather than pay the entire amount in cash. As part of a home loan transaction, a borrower typically signs two main documents: a promissory note and a mortgage (or deed of trust).
A promissory note is like an IOU. A promissory note is the document that contains a borrower’s promise to repay the amount borrowed.
Mortgages and deeds of trust give the power to foreclose. A mortgage—or, in some states, a deed of trust—is the contract that gives the lender the right to foreclose if the borrower doesn’t make payments on the loan. . When the lender records this document in the land records, it creates a lien on the home.
Endorsements and assignments. Promissory notes are transferable, and banks often buy and sell home loans. When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. The seller documents the transfer by recording an assignment of the mortgage or deed of trust in the land records.
Foreclosure Steps
If you default on your loan by falling behind in payments or breaching the agreement in some other way, the servicer will probably refer the loan an attorney or trustee for foreclosure. Foreclosure works differently in each state, but there are two basic types: judicial foreclosures and nonjudicial foreclosures.
Judicial foreclosures. In a judicial foreclosure, an attorney files a lawsuit on behalf of the lender or investor in court to foreclose the home. You’ll receive a copy of the complaint, sometimes called a petition, which starts the foreclosure. You then get a certain number of days, like 30, to respond to the lawsuit. If you don’t file an answer in court—or if you file a response, but the court decides the foreclosure should go ahead—the court will grant a judgment of foreclosure in favor of the foreclosing party and set a sale date. The foreclosure sale is typically an auction where the public, as well as the foreclosing party, may bid on the property. The highest bidder becomes the new owner of the home.
Nonjudicial foreclosures. All states allow judicial foreclosures, but about half also permit nonjudicial (“power of sale”) foreclosures. In a nonjudicial foreclosure, an attorney or trustee (again, on behalf of the lender or investor) completes certain out-of-court steps. Typically, a nonjudicial foreclosure involves one or more of the following steps, depending on state law:
mailing the borrower a notice of default that tells how much time the borrower has to reinstate (get caught up on payments)
recording the notice of default in the local land records office, and
mailing the borrower a notice of sale that states when the property will be sold. Like in a judicial foreclosure, the property is usually sold at a public auction.
Depending on state laws, a borrower might get a combined notice of default and sale, a notice of sale, or notice by publication in a newspaper and posting on the property or in a public place.
After Foreclosure: Right to Redeem, Deficiency Judgments
You own your home up until the foreclosure sale. This means you may legally stay there until this time. In addition, depending on state law, you might be able to stay in the home until the redemption period expires or until some other action, such as ratification of the sale, occurs.
What is a redemption period? Certain states have laws giving a foreclosed homeowner the right to regain ownership of the home—called “redeeming” the property—after a foreclosure sale by reimbursing the buyer for the amount paid at the sale or by repaying the full amount of the mortgage debt.
What is a deficiency judgment? Sometimes, a foreclosure sale doesn’t bring in enough money to fully repay the home loan. When this happens, the difference between the sale price and the amount owed is called a deficiency. In certain states, the foreclosing party can get a personal judgment—a deficiency judgment—against the borrower for this amount.
Sometimes, A Reforeclosure Is Necessary to Clear Up Title to the Property
Homeowners occasionally face back-to-back foreclosures when the title to the property has problems after the first foreclosure. The second foreclosure is called a “reforeclosure.”
Defenses to Foreclosure
Depending on state law and your individual circumstances, you might have a defense to a foreclosure. A few potential foreclosure defenses include:
you’re entitled to protection from foreclosure under the Servicemembers Civil Relief Act
the servicer didn’t follow state foreclosure procedures
the servicer didn’t follow federal mortgage servicing laws, or
the servicer made a serious mistake.
Talk to a Lawyer
While this article provides a general picture of how foreclosure works, laws vary from state to state. To get specific information about your state’s foreclosure procedures and how they apply to your particular situation, consider talking to a local foreclosure attorney.
If you’re struggling to pay the property taxes on your home, you could be at risk of losing the property to foreclosure or a tax sale.
If you’re struggling to pay the property taxes on your home, you could be at risk of losing the property to foreclosure or a tax sale. But you might be able to either reduce the amount of property tax that you have to pay or buy yourself some extra time to get caught up on what you owe.
Challenging Your Home’s Assessed Valuation
One thing you can do to reduce the property taxes you have to pay is to challenge the assessed value of your home. The property taxes are primarily based on your home’s assessed value.
All states have specific procedures for challenging—or “appealing”—the assessed value of the home. Typically, you’ll need to dispute the value shortly after you receive the bill. To prevail in your challenge, you must show that the estimated market value placed on your property is either inaccurate or unfair. Also, some states require that you pay the bill before making the appeal. You’ll then typically get a refund if you’re successful in your challenge.
Be sure to follow the procedures carefully otherwise you might lose the appeal. Check the tax assessor’s website online or review your property tax bill to learn about the specific procedures, as well as what sort of documents and evidence you’ll need, to make your challenge to the value the assessor placed on your home.
Abatement, Deferral, and Repayment Programs
Each state has property tax abatement (reduction) or exemption programs that allow certain homeowners to reduce the amount of property tax they must pay based on age, disability, income, or personal status. For example, older homeowners and veterans often are entitled to a reduction of their property taxes. Ordinarily, you’ll have to apply for the abatement and provide proof of eligibility.
In some states, abatement isn’t possible if you’re already delinquent in your tax payments. But you might qualify for:
a deferral (where you’re allowed to postpone paying the taxes if you meet eligibility requirements), or
a repayment plan.
In addition, many states permit the taxing authority to compromise on the amount of taxes that are due or to waive penalties and interest.
Losing Your Home for Failure to Pay Property Taxes
When you don’t pay your property taxes, the taxing authority could sell your home—or its lien on the property—to satisfy your debt. (To get details on how both of these processes work, see What Happens If You Don’t Pay Property Taxes on Your Home?
Or, your mortgage lender might pay the taxes itself and then bill you. If you fail to reimburse the mortgage lender, it might foreclose on your home. If you’re facing a potential foreclosure, consider contacting an attorney to find out about your options.
Foreclosures affect mortgage holders and their future housing situations because they negatively impact credit scores. In fact, for individuals with high credit scores, a home foreclosure can deduct up to 100 points from their grade. Typically, those foreclosed upon will look for a rental before they apply for another home loan because they are unable to qualify for financing for at least another year. But since foreclosures impact credit scores, finding a good apartment with less than exemplary credit is tricky.
To navigate today’s competitive rental market with a foreclosure on your credit history, use the following tips.
Start your search fast
Foreclosures don’t appear on credit reports right away – the process takes time. If possible, search for an apartment and lock down your lease before the foreclosure is finalized. While your previous missed payments leading up to the actual foreclosure will likely be processed and reported to the credit bureaus, these won’t have as large of an impact as the foreclosure itself, and will only be reported when you have been in default for more than 30 days. Even so, prepare some explanation for when a landlord asks about missed payments upon reviewing your financial history.
Provide a hefty deposit
Your landlord might be willing to overlook your less than satisfactory financial history if he or she is given a heftier deposit. The up-front lump sum proves you have the ability to pay monthly rent and gives them a safety net in case you do fall into financial trouble again in the future. Overall, larger down payments give landlords peace of mind.
Search for a private landlord
Privately-owned apartments and in-law units owned by single-family homeowners sometimes don’t require credit checks. While this is not something you want to ask up front, as it is a red flag to the landlord, searching for these property types maximizes your selection of rental homes and betters your odds of being selected. Try searching for condos for rent, as well. Finding an agent who has access to private listings is typically the easiest way to searching for and scheduling showings with single-family homeowners renting out their spaces.
Minimize your additional debts
Keeping your other finances in check after the foreclosure helps your credit bounce back sooner. Plus, having a balanced and manageable financial portfolio will help you better cope with your recent asset loss and start fresh – totally debt free.
Ask a friend to cosign
If you’re having trouble getting approved, ask a friend or family member to put his or her name alongside yours on rental applications. Cosigners assume responsibility for monthly payments should you fail to pay rent, which helps landlords feel safeguarded when leasing to those with past financial defaults on their reports. If you are enlisting a cosigner, be extra cautious with budgeting for your rental. If you were to ever fall short on rent, your friend or family member would be responsible, and you would end up owing that person money in the end.
Finding an apartment or private rental after foreclosure shouldn’t be a hassle, and likely won’t when the proper due diligence is applied.
Learn what you can do after the foreclosure sale, from staying in the home for a certain period of time to buying the property back.
If your home was recently sold in a foreclosure sale, but you haven’t yet moved out (or if you’re currently going through a foreclosure), you might want to know what happens next. Some homeowners quickly leave the home after the home is sold. However, depending on your circumstances and your state’s laws, you might have other options to either stay in the home for a longer period of time, get money to move out sooner, or even buy back the home.
Redeeming the Home
Some states permit a foreclosed homeowner to buy back the home within a certain period of time after the sale. This is called a redemption period. To redeem the home, you usually have to pay the total purchase price, plus interest, and any allowable costs, to the purchaser who bought it at the foreclosure sale. In some states, though, you’ll have to pay the total amount owed on the mortgage loan, plus interest and expenses.
The deadline and procedures for exercising a right of redemption varies from state to state, and not all states provide a redemption period after the sale.
Getting Help to Buy Back the Home
In order to redeem, the former homeowner has to come up with another source of financing. But getting a bank to lend you money after a foreclosure can be very difficult, even if you have a steady income, because your credit score will have taken a bit hit. (Learn how a foreclosure affects your credit score.)
Some special programs are available to help homeowners in this type of situation. For example, a program called Stabilizing Urban Neighborhoods (SUN) offered by a nonprofit organization helps foreclosed homeowners in Massachusetts, Maryland, Rhode Island, New Jersey, Illinois, Connecticut, and Pennsylvania by purchasing foreclosed properties and then reselling those properties back to the former homeowners, usually at current fair market value, with a new, fixed-rate 30-year mortgage. (Learn more about the SUN Initiative.)
Live in the Home During the Redemption Period for Free
If your state provides a redemption period after the sale, you sometimes have the right to live in the home payment-free during this time. For example, in Michigan, most homeowners get a six-month redemption period (some people get a year) during which time they can live in the home. (Under some circumstances, though, like if the foreclosed homeowner unreasonably refuses to allow the purchaser to inspect the home, the purchaser can begin an eviction sooner. )
By staying in the home during the redemption period, you can save money by living rent-free. This way you can use the money that you otherwise would have spent on housing to pay other bills and start rebuilding your credit. (To learn more about your rights during the redemption period in your state, if there is one, consider talking to a local foreclosure attorney.)
Remaining in the Home as a Tenant
In some cases, you might be able to remain in the home as a tenant after the foreclosure sale. For example, Freddie Mac offers a program that allows recently foreclosed homeowners to rent their home on a month-to-month basis, if Freddie Mac acquires the property as a result of foreclosure. (You can learn more about this program, called the Freddie Mac REO Rental Initiative, at the Freddie Mac website. If you want to find out if Freddie Mac owns your loan, go to www.freddiemac.com/mymortgage or call 800-Freddie.)
Live in the Home Until You’re Evicted
If you don’t move out after the purchaser gets title to the home (typically either after the sale or after the redemption period), the new owner (often the foreclosing party) will start eviction proceedings to remove you from the property. The length and procedures for the eviction process varies from state to state. In some cases, the foreclosing party can include the eviction as part of the foreclosure action—depending on your state’s law and the circumstances of your case—while in other instances, it will have to file a separate eviction action with the court.
You might receive a notice prior to the start of the eviction (called a Notice to Quit), which gives you a certain amount of time—for example, three days—to leave the home before the eviction officially starts. While you can stay in the home until you’re forcibly removed through the eviction process, it is generally best to leave the property before this time period expires.
Getting a Cash for Keys Deal
To avoid having to complete an eviction, the purchaser might offer you a “cash for keys” deal. With this arrangement, you agree to leave the home by a certain date, and in good condition. In exchange, the purchaser gives you a specified amount of cash to help pay for your relocation costs.
You can request a cash-for-keys agreement if the purchaser doesn’t offer you one. You can contact Result Capital for that.
