Released September 23, 2009
URBANA, Ill. — When a foreclosure is final, the financial and emotional turmoil is far from over, but research suggests that most families will again become homeowners in time, said a University of Illinois Extension consumer and family economics specialist.
"Fannie Mae rules state that five years must elapse after a foreclosure before a family can purchase another home, but that gives people time to make some smart financial moves and recover financially," said Susan Taylor.
Other rules that apply after five years but before seven years include:
- You may purchase a principal residence with a minimum of a 10 percent down payment and a minimum credit score of 680.
- Purchase of a second home or investment property is not permitted.
- Limited cash-out refinances are permitted for all occupancy types according to the eligibility requirements in effect at that time.
- Cash-out refinances are not permitted for any occupancy type.
Finding a new home
A foreclosure can hurt a former homeowner's credit score for a number of years, although credit companies don't disclose the exact duration. "It will remain on your credit report for seven years, but its impact will lessen over time," she said.
"Renters in a competitive market should put together a rental resume explaining why they experienced foreclosure or other credit problems. Include your reasons for wanting to rent the home and where your job is. Write up a real story. It will be tough, but you need to sell the owner. It's like a job interview," she said.
Lack of cash for a rental deposit may be a big barrier to renting a new home. Landlords typically refuse to rent to people who have poor credit, which can result from a late mortgage payment, short sale, foreclosure, or bankruptcy. A credit score of 580 may help, she said.
"If the rental candidate has a solid job history, they may be accepted. And a landlord may double the deposit for a renter who's on the edge," she said.
Families may not be able to find housing that's as spacious as what they're used to, and pet-friendly rental housing can be hard to find, she noted. "Try to make plans as soon as you think foreclosure is inevitable," said Taylor.
Suffering through the credit fallout. Creditors watch your credit history and when they see a default on the family's mortgage, they wonder if they're next in line. Credit cards have a "default rate," and foreclosed owners could see their interest rate jump to high levels--up to 30 percent. They will have trouble getting a decent car loan too, she said.
"If you have a good credit record otherwise, you may be able to rehabilitate your record in 24 months. Unfortunately, a foreclosure is rarely the only slip-up, and when it's combined with other punishing rates, it can be challenging to climb back up to a good credit score," she said.
Buying another home
Fannie Mae's five-year waiting period deters borrowers who have made reckless debt decisions. If a foreclosure resulted from situations beyond a family's control—job loss, uninsured health condition—they may be able to buy a home in three years if they meet all of the requirements without the required credit score of 680, she said.
"A family may want to consider obtaining a mortgage with a federally insured FHA loan. The minimum time is three years, with or without extenuating circumstances. They will still have to show good bill-paying habits after foreclosure," she said.
Explaining to a potential employer
If you lose your job as well as your home, a foreclosure may hurt you in positions that involve handling money, from cashiers to accountants. Employers will do a credit check, but they are required to notify the applicant. "If you're applying for this type of job, have an explanation ready for the interview," she said.
Getting hit with a tax bill
"You lose your home and a bill arrives 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's a taxable event. The IRS considers it income," said Taylor.
Exceptions include when foreclosed owners have lost their principal residence and didn't have a mortgage that they had previously taken as a cash-out refinance to use the proceeds for expenses other improving their home, she said.
"Foreclosure victims may not have to pay a tax tab, even if they had a cash-out refinance. The IRS has long allowed taxpayers to escape a bill on forgiven debt if they are insolvent. For example, if you receive a Form 1099C from a lender saying it couldn't recover $5,000 of what it was owed, but your debts exceed your assets to the tune of $15,000, you must file a Form 982 with your tax return. Consult your tax preparer for more information," she said.
Coping with the emotional fallout
"This is tough emotionally, no doubt about it. Your children may have to leave their school and friends and learn new routines. But the sheer number of foreclosures may lessen the stigma and prompt people not to make judgments.
"Take care of yourself and visit U of I Extension's "Getting through Tough Financial Times" website at http://www.ToughTimes.illinois.edu for tips on coping with stress, which bill to pay first, what to tell your creditors, talking to your children about your financial situation, and more," she said.
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http://www.aces.uiuc.edu/news/stories/news4904.html
Source: Susan Taylor, (708) 720-7520, setaylor@illinois.edu
Writer: Phyllis Picklesimer, 217-244-2827, p-pickle@uiuc.edu
