Foreclosure - Cause and Effects

For homeowners, the one word that invokes the most concern is foreclosure. Whether through tragic circumstances or situations beyond the homeowner's control, foreclosure is a threat that can lead to many problems in the future. Fortunately, foreclosure is something that can be avoided in times of financial trial, if one knows where to get help.

Foreclosure is defined as the legal process that occurs when a homeowner, or owner of any property, loses interest and ownership in the property when he is unable to make regular payments on the mortgage. In other words, a if a homeowner can't come up with the monthly amount to satisfy lenders, he can lose his home if it is foreclosed.

How Does Foreclosure Happen?

There are a number of reasons why foreclosure happens, all of which are related to a homeowner's inability to make payments on the mortgage. These may include:

• Loss of job - whether by downsizing or disability, the lack of a steady income can prove hazardous to one's finances
• Divorce or separation - where jointly-owned property is concerned, a homeowner may have to foreclose if he/she doesn't have enough in a solo income to make house payments
• Unplanned home or car repairs - unexpected situations may happen, and leave the homeowner unprepared if money is needed for emergencies
• Filing for bankruptcy - sometimes when a person files for bankruptcy his/her tangible assets are liquidated to satisfy debt

For homeowners dangerously close to any of these situations, it is best to be prepared in the event foreclosure must become an option to relieve debt.

What are the Effects of Foreclosure?

Foreclosure means more than just losing a home. It can haunt a person for years down the road. Other problems that may result from foreclosure include:

• Loss of equity earned in your home. The value of your home may increase each year. In many cases the combination of the equity and the increased value of your home can translate into losing thousands of dollars.
• Increased taxes. A lender who loses money from the sale of a foreclosed home must report the loss to the IRS. Subsequently, the IRS may require you to report the lender's loss as income on your next tax return and you may be required to pay taxes on it.
• Inability to borrow money in the future. A foreclosure can destroy your credit profile almost overnight. This derogatory mark on your credit report will label you as a bad credit risk for at least 7 years. This can result in declined applications for credit, the inability to rent an apartment, limited employment opportunities, and a host of other implications that can follow you for a long time.
• Lawsuits. The mortgage company can go after you for damages.
• Loss of employment. Some employers require their employees to maintain good credit histories. Notification of a foreclosure may be grounds for dismissal or loss of a chance for advancement and better pay.
• Loss of self-esteem and self-worth. Emotionally the stress of foreclosure can have serious effects on your well-being. The stress that foreclosure brings can lead to depression, feelings of worthlessness, lack of motivation, embarrassment around family and friends, and the list goes on.

In order to prevent foreclosure, it is strongly recommend to take action if your finances begin to appear unstable. The guidance of a loss mitigation counselor, for one, can steer a homeowner in the right direction with regards to saving property.

Dan Schultz operates American Loss Mitigation, Inc., a consultancy dedicated to helping people prevent home foreclosure. Schultz also trains interested people to become loss mitigation counselors.

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