No homeowner imagines on the day of signing for their new home that they could one day be facing foreclosure. It is one of the most stressful situations you can go through in your life.
Studies show that home foreclosure has adverse effects on both the physical as well as mental health of an individual. In the US alone, there are currently 417,624 properties that are in foreclosure.
But is it all doom and gloom? Is there a silver lining to this dark cloud?
This article deciphers the pros and cons of going into foreclosure to help you make the right decision. Read on.
Pros of Going into Foreclosure
Going into foreclosure is essentially another way of describing pre-foreclosure. But, what does pre-foreclosure mean and how is it different from foreclosure?
Well, it all has to do with the timing. If you are more than 90 days late on your mortgage payments, the bank initiates the foreclosure process.
Once this process is complete and the bank takes back ownership of the house, the property is said to be foreclosed. Let’s explore some advantages of going into foreclosure.
1. You Get to Stay On Your Property Longer
Going into foreclosure can be a stressful experience. Luckily homeowners going through a foreclosure can stay on their property for up to 12 months.
In the event that trust deeds are used homeowners are given up to four months until the property can be sold. This gives you more time to find investors willing to purchase foreclosure homes for sale as-is.
What’s more, even when the legal foreclosure process is completed, the property remains yours until it is assigned to a new owner. It would be up to the new owner to evict you which is an entirely new process. The point is, the foreclosure process gives you time.
2. You Don’t Have to Spend Money on Renovation
If you’re going into foreclosure, you most likely have no additional funds you can invest on sprucing up your property. If you really think about it, why would you spend money investing on something that you’re about to lose anyway?
Going into foreclosure buys you time to find an investor who can buy your property in the condition it’s in. That gives you one less thing to worry about.
3. The Home Is No Longer a Lucrative Investment
People own homes for different reasons. If you bought a home for investment purposes your financial expectations will be different from that of a person who bought the home as a primary residence.
Say, for instance, you took out a loan to purchase the home as an investment. After a while, you realize that it no longer meets your financial expectations.
The easiest way for you to make a quick buck is to go into foreclosure to avoid making a loss especially if you can’t find a property investor who’s willing to take the property off your hands.
4. You Have Some Leverage
Here’s the thing. Banks don’t like to foreclose. Each bad loan costs them way more than what they get out of the foreclosure sale.
If they can avoid this then they will at all costs. So, here’s what you can do to leverage that.
Approach the bank and negotiate with them to give you better terms on your mortgage obligations. Chances are the bank will be willing to get you better terms.
However, if you’re going into foreclosure chances are you’ve defaulted for a couple of months in which case the improved terms won’t do much for you anyway. That would be the perfect cue to find a property investor, and transfer your mortgage to them.
Alternatively, if you get an investor who’s willing to pay cash for your home as you head into foreclosure, the lump sum they’ll pay you is enough to wipe out your entire mortgage. You can then use the cash for a fresh start.
5. Take Advantage of the Competition
Distressed homeowners and property investors have one thing in common: Time (or the lack thereof). Homeowners going into foreclosure want to offload their property as fast as possible.
Property investors, on the other hand, need to have cash in hand if they want to secure foreclosure homes. When your property goes into foreclosure, all an investor has to do is look up “foreclosures near me” and they’ll be presented with numerous options. Yours will likely pop up in the listings.
They will then approach you and offer to buy your home before the foreclosure process is completed. You can, therefore, negotiate with them to get the best deal on your home.
Cons of Going into Foreclosure
Going into foreclosure is always the last resort after all other avenues have failed. If you can’t get an investor to buy your property and it ends up going into foreclosure, the repercussions can be dire. Here are some disadvantages you should be wary of:
1. Your Credit Score Takes a Hit
At the risk of stating the obvious, going into foreclosure taints your credit score. This remains on your credit report for at least seven years.
Any future loans you might want to take will be a lot more expensive for you. You’ll have stricture loan requirements that might require you to put down a sizeable down payment that is completely out of reach for most people.
It doesn’t end there. It might affect your eligibility to apply for any form of credit, insurance or even rental housing.
2. Tax Implications
Homeowners who go into foreclosure are left grappling with federal income tax issues. You‘ll still owe Uncle Sam taxes on any unforgiven mortgage loan balance. This wouldn’t be a problem if you sold your home to a property investor to clear your balance.
3. It’s Expensive
Lengthy foreclosure processes cost money. According to reports the average foreclosure costs associated with delinquency amount to $58,759.
That’s a heavy financial burden to bear. Selling to a property investor before it gets to that point is the best way out of the mess.
4. It’ll Be Difficult to Qualify for Another Mortgage
Going into foreclosure means that you won’t be able to apply for another mortgage for at least 7 years. The moment lenders notice that you have a foreclosure on your record they’ll simply shut the door on your application.
5. You Lose Equity from the Sale
It is in your best interest to sell a pre-foreclosed home to a property investor if you want to get more equity from the sale. If you wait until you go into foreclosure, the bank will only be looking to recover the amount you have left on your mortgage as opposed to trying to find the best deal out of the process.
Some Final Thoughts
Prevailing financial wisdom dictates that you should avoid going into foreclosure at all costs. Ensure that you consider all other options available to you before throwing in the towel.
If you’re headed into foreclosure and you need to sell your home fast consider getting a property investor to buy your property. You’ll typically have cash in your hands within a couple of days.
Are you going into foreclosure in Colorado Springs or Pueblo and need to sell your house quickly? Contact us today. We’ll be happy to answer any questions you might have.
