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How Will Foreclosure Impact You?

How Will Foreclosure Impact You?

Losing a home to foreclosure is a devastating event, both emotionally and financially. Not only will your credit score suffer, but it takes years of on-time payments and high-interest rates on credit cards with limited credit to get your score back up. Recovery becomes very challenging under those circumstances. Typically, lenders want to see a credit score of 620 or higher - foreclosure hurts those number drastically.

Are you aware of the Tax Implications?

Few people are aware of the tax consequences of a foreclosure. A title transfer and tax assessment fees may be assessed.

The IRS rules stipulate that any monies borrowed and not paid back are considered taxable income.

Foreclosure is considered a debt forgiven and therefore becomes a taxable event. The loan amount is considered income due to the fact that there is no longer an obligation to repay the lender.

Once sold, the assessment is calculated. The value of the property, at that time, was the basis for the original loan. There are several adjustments that follow and that are taken into consideration involving the sale of the foreclosed house:

  1. The original amount of the loan
  2. How much you've paid on the loan
  3. How much the property sells for
  4. The portion that becomes taxable to you (If any)
  5. If canceled debt tax applies

A discharge through bankruptcy is typically the only instance where it is not taxable. The professionals at the Law Offices of James Shields offer free consultations and can guide you on the best course of action for your specific situation.

When Can You Buy Another Home

The waiting period is dependent on the type of foreclosure. While not completely impossible, it is arguably more difficult to purchase a home immediately after a foreclosure. Most lending institutions require a waiting period before considering a loan application.

If good documentation exists supporting extenuating circumstances, i.e. death of a spouse, extended illness, an accident with severe injuries resulting in loss of job, the waiting period may be shortened.

Although it has a 3-year waiting period, a federally insured FHA loan is one of your best options when trying to re-enter the homeowners market after a foreclosure. You will still have to provide verifiable good bill-paying habits since the foreclosure regardless of extenuating circumstances. Here are some waiting periods for consideration:

  • Buying a house after foreclosure.................................................5-7 years
  • Buying after foreclosure with extenuating circumstances................3-7 years
  • Buying after a deed in lieu of foreclosure......................................4-7 years
  • Buying after a deed in lieu of foreclosure w/exten. circumstances......2-7 years
  • Buying after a short sale...............................................................2 years

Remove Foreclosure From Your Credit Report

The Fair Credit Reporting Act states that foreclosures can appear on your credit file for a maximum of 7 years. If your report contains inaccurate information, you may be able to have it removed before the 7 year reporting period. You have the right to dispute and have wrongful information, removed from your credit report, including foreclosures that were not automatically removed after the 7 years; However, keep in mind that if you continually dispute your foreclosure with the credit bureaus, they have the right to refuse to investigate--your additional disputes become "frivolous".

Follow these steps to remove erroneous information your credit bureau reports:

  • Step 1 - Request your credit reports from Equifax, Experian, and TransUnion; according to the Accurate Credit Transaction Act you are entitled to one free report a year
  • Step 2 - You will find the foreclosure listings in the "Public Information" or Public Records" section. Verify the date of the foreclosure is no more than 7 years old.
  • Step 3 - Notify each credit bureau the foreclosure notation still appears on, if >7 years ago stating that Section 605 of the FCRA prohibits foreclosures information from remaining in credit reports for more than 7 years. the Federal Trade Commission recommends you submit your dispute in writing so as to have a trackable timeline. You also have the option of You may dispute credit notations by telephone or online as well.
  • Step 4 - Examine entries closely for errors--if any details within the notation are incorrect, such as the date the foreclosure was filed, or the amount you owed, you may be entitled to having that entry removed early.
  • Step 5 - Contact the original lender and advise them of the inaccuracies and that they either need to correct it or remove it--most lenders opt to remove an entry.
  • Step 6 - Copy any documents proving the foreclosure notations are incorrect. Submit these along with a letter explaining that you want the listing either removed or correct, and a copy of your credit report. Send to each credit bureau affected
    • The FCRA allows 30 days for credit bureaus to investigate errors and to verify or correct them. If the credit bureaus cannot verify or correct your foreclosure notation, it must be removed. (1)
  • Step 7 - If a lender knowingly verifies erroneous information with a credit bureau you may be able to file a lawsuit against them. This is a perfect example of why you should contact the James C.Shields Law Firm for the right advise. Most lenders would rather forego court costs and opt to remove the foreclosure listing.

Your free credit reports are available online through AnnualCreditReport.com. This website is the only internet source recommended by the Federal Trade Commission for free credit reports.

If you still owe your lender money post-foreclosure, the attorneys at the Law Offices of James C. Shields can attempt to negotiate for the removal of the foreclosure from your credit report in exchange for that payment. Call them today for a free evaluation!

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