Foreclosure: Kiss Your Next Mortgage Good-bye
Lenders consider bankruptcy a serious credit issue, but not as bad as home foreclosure. Just being late with mortgage payments is counted heavily against you, worse than having a collection account. Those who skip their mortgage payment to pay other bills are doing their credit serious harm. According to debtworkout.com, "foreclosures can be viewed as one of the worst things ever on a credit report. Even so, some banks will make you a loan very soon after a foreclosure. Be prepared for very large down payments and high interest rates. Most often the terms of these loans prevent people from buying another house..."
FHA lenders won't consider making a loan to an applicant with a foreclosure for AT LEAST THREE YEARS, while those who file for bankruptcy only have to wait two, and only one year with mitigating circumstances. Once you prove your willingness to walk away from your home to avoid your obligation, few mortgage lenders will want to put themselves in the role of "sucker" the next time you need a loan.
Lenders More Forgiving
While lenders won't be throwing you hearts and flowers following a bankruptcy, they are a lot more forgiving than if you let your home go into foreclosure. In fact, homeowners who paid their bills on time right up to the day they filed for bankruptcy take a minimal credit score hit -- I have seen borrowers six months out from a BK with credit scores over 700. Your score down the road depends on how you go about bankruptcy. Make payments on time while you consult a bankruptcy attorney or credit counseling service. If you let your bills go for six months and then get around to filing things go worse for you.
Bankruptcy vs Foreclosure
First, filing for bankruptcy will temporarily halt any pending foreclosure proceedings on your home -- giving you a chance to sell it or work out a resolution with your lender. Second, bankruptcy may relieve you of other monthly obligations, making it easier to meet your housing expenses. Foreclosure only gets rid of your mortgage, and then you still have to find a place to live and pay for it. So your finances might not improve all that much. And finally, in most states your lender may be able to force you to pay what is called a "deficiency" when your foreclosed home is sold, meaning they can hit you up for the difference in what you owed and what they were able to get from selling your property. If this happens you might have to file for bankruptcy protection anyway.
Last Resorts
Blowing off your mortgage just because your home value has decreased is plain stupid; in addition to legal fees, interest, and deficiencies, you will pay a lot more for credit for a very long time. And as long as you remain in your home its value is not much of an issue. Real estate markets are famous for their ability to bounce back -- but you won't bounce back so quickly if trash your credit with a foreclosure. By letting the house go you could be forced into paying thousands out of pocket for a temporary decrease in value; when the lender has to sell your house cheaply and forces you to pay a deficiency, you will have turned a "paper" loss into a real one.
Foreclosure is appropriate only when your lender is unwilling to modify your mortgage in a helpful way, AND there is no way for you to pay your mortgage, even if you discharge your other obligations (or you don't qualify to file bankruptcy). In addition, some don't qualify for a bankruptcy filing; if yours gets dismissed, foreclosure may be the only way out.When financial problems hit, there's no easy way out. But bankruptcy may be an easier way out than others.
