What Really Happens after I “Give it Back to the Bank”?

I have been hearing people saying lately that foreclosure is so common now that being foreclosed really doesn’t have the same negative impact on credit and borrowing ability as it used to. Can this be true? Absolutely not. This article is directed at those folks who are considering walking away from a property they own because it has lost value – not because they are having a financial hardship, like job loss. If you choose to “give it back to the bank” you should understand the long term implications. A foreclosure will have at least 5 potential long term issues associated with it.


Credit Score Damaged

OK, it goes without saying that your credit score will be hammered. This is not an exact science and depending on what your credit report looks like now will affect the score reduction. However, you can expect your score to go down by 100 maybe 200 points or more and stay that way for several years. The foreclosure itself will stay on your credit report for a minimum of 7 years and you’ll be explaining that to creditors any time you apply for new debt.

New Loans Hard to Get
Lenders of all types – automobiles, credit cards, department stores, gas stations, installment loans, mortgages, home equity loans, every lender uses your credit score and credit report to determine your willingness to repay your debts. If you walk away from a mortgage loan every lender you currently borrow from, and those that you may apply with in the future, are going to wonder “If you didn’t repay that loan what’s stopping you from walking away from our debt?” You will not be able to obtain any mortgage financing for approximately 4 years (and only then if you have re-established good credit) and you may even have trouble leasing a place to live because landlord’s look at your credit score.

Existing Credit Cards Limit Reduced and Rates Increased
Surprising to some folks, your credit card companies review your credit report every year and even if you are paying that bill on time they can and will raise the interest rate on your credit card if your credit score goes down. They may also reduce your credit limit or change the terms on your card or even cancel and close the account.

Higher Insurance Rates
Insurance companies also use credit score as one means to determine risk and they may increase your rates if a score reduction occurs. This can impact your auto insurance, home insurance, even your health insurance!

Home Equity Loans and Second Mortgages can continue Collection Efforts
One thing that most people do not understand about foreclosure is what happens to a second lien on the house. If you have a home equity loan or a second mortgage on the property that lender will be forced to release their Lien on the home for the foreclosure to go through. However, this does not mean that they give up their legal ability to collect on the debt. The second mortgage lender will place a collection account on your credit report for the full amount of the debt and that collection account will not go away until you pay them off or settle the debt. This will make the impact of the foreclosure even worse for your credit score and ultimately you may be forced to pay the debt even after the foreclosure is completed.
The bottom line here is that the impact of a foreclosure has not changed. If anything has changed it’s the perception that letting a home go to foreclosure is somehow OK. Foreclosure will have far reaching implications on you and will continue to haunt you for years to come. If there is a course that you can follow that does not involve “giving the keys to the bank” then you should look hard and long at it because the foreclosure may seem like a good short term fix but in the long run it’s going to cost you a lot of money and heartache!

Comments

  1. says

    Ken,

    I have read that the FBI is asking that records on foreclosures be kept 10 years instead of 7. This might indicated that they plan to investigate mortgage and foreclosure fraud in the future, as they should. People might feel like they got away with something now, but I don’t think I would rest easily at night if I knew that it wasn’t really over. So much money is being lost on this crisis that I am almost certain attorneys for the banks and the government will be digging through these files in the future looking for opportunities to recover whatever they can.

    A short sale is usually a better option for the home owner. They can attempt to get guaranties from the bank that the debt will not become collectible and the shortfall will not be taxed.

  2. says

    I understand completely the thrust of your article, and agree that when possible a short sale makes a lot more sense for lender and homeowner. I will say though that lenders are not making short sales very accessible … they are frankly a royal pain. It’s easier to get in touch with a lender for a loan modification than it is for short sale decision.

    I think home owners get so tired of the run around that they just give up and leave their home, normally way too early since foreclosures take many many months. Add to that the hundreds of little foreclosure vultures who prey on these distressed property owners and you have a nightmare.

    daltonsbriefs’s last blog post..What’s the solution to Gary Indiana?

  3. says

    Thanks Maureen and dalton’s Brief- great follow up comments. The vultures truly have been circling over the past year and a lot of people have found illicit ways to profit from our collective economic ills. Indeed, the FBI is and will be investigating many of these foreclosures and foreclosure purchases to determine if there was fraud involved. Short sale can be a better option for many people.

  4. says

    Hmmmm…….is there an anonymous fraud turn-in line? I know of someone who has been planning her “foreclosure” and subsequent move to Florida for over 5 months. She has plenty of money to continue paying the mortgage until it sells, but she is tired of dealing with it. She already owns a house in Florida, so she’s not worried about her credit rating. Very soon she will pack her stuff, head south and dodge all responsibility to her Clinton Township mortgage. It’s quite appalling.

  5. says

    Marianne – Hi! I’m not sure that what you described is actually against the law but it sure should be! The main cause of our country’s economic ills is due to this exact issue. When people like this choose to be foreclosed their home sells at a depressed price and that reduces real estate values of homes in the area. This drop in prices inspires other people in the area to leave their homes to foreclosure and the problem gets worse. It’s a domino effect. Then of course the banks are losing tons of money on these foreclosures and need to be bailed out. This person and people like her are the root of all of our problems.

  6. Detroit Foreclosure says

    Hello Ken,

    Thank you very much for your post on foreclosure information and I am agreeing with Dalton’s comment. I also read your other post and your post are nice and good informative.

  7. Don. F says

    I am in the situation where after my divorce i tried to do a short, my buyer was pre-approved, met all terms,so I let them move in before our closing date. I recieved a call that the buyers credit for the strangest reason went bad. Mind you while I am waiting on a closing date, I went and got an apartment. My income level was 70% lower with the same job. just to much to put in an e-mail!!!

  8. says

    Hi Don F.
    One of the first rules of Real Estate sales – never let the buyer move in until after closing and they own the house!! Not sure how your going to get out of that one . . . . . Maureen, any suggestions??

  9. rebuilding says

    Hello Ken,

    My husband lost his job and though he did everything he could by working side jobs and with a landscaping company, it just wasn’t enough to cover our $250k mortgage and so as a result, we lost our 1st home last October. We were heartbroken as we renovated this home with our own hands.

    We then went to Lake Village of Auburn Hills to rent an apartment. They convinced us into a two year lease of which we broke a year early due to the fact that it was infested with bugs and I had a baby that was going to crawl anyday. As if having my child on the floor with them wasn’t enough of a justification to leave, when we started finding them in our bed, we couldn’t justify staying ANY longer. We gave the complex one opportunity after another to try and rid these insects from our home but to no avail. We did get an attorney to see if they would be willing to let us out of the lease based on our situation and the fact that we had so much evidence but they wouldn’t even take the time to look at all of the evidence that we had (pictures, video, personal testimony from other parties). Instead, they sued. We couldn’t afford to pay the approximately $3k to $5k to move forward with it so our only option, or so we thought, was to file for bankruptcy in order to start rebuilding from there (we haven’t actually done it yet). Lake Village is asking for roughly $17,000 from us of which we can’t afford. I’m wondering about the foreclosure as well. I haven’t heard anything from the 1st lien about repayment and such. Will they come after us for repayment?

    I guess I’m just not sure what to do at this point. At first, we wanted to honorably pay our debts one by one, but we’ve been served 3 times for 3 different debts (one for a $10k loan that we took out to help pay for our mortgage while my husband was laid off, one credit card for $5k again to help pay for living expenses and now $17k for Lake Village) and I fear we’re just way over our heads, especially because of Lake Village. Can you give me any suggestions as to how we can set ourselves back on the right path? If at all possible, we would like to avoid bankruptcy and would like to honorably pay what we can. We want to be homeowners again and we’re willing to do what it takes. Any help or direction you can give is greatly appreciated.

    Thank you!

    “Trying to rebuild”

  10. says

    Dear Rebuilding-
    Sorry to hear about all of your troubles. You guys are definitely due for a streak of good luck! Unfortunately, I cannot give you specific advice on filing bankruptcy – but, you could make a payment plan with the creditors you owe money to and pay them over time instead of filing BK. After a 1st lien foreclosure, typically, the bank does not go after the borrower, but, it is possible. If you plan on being homeowners in the future you must begin to re-establish credit. A bankruptcy after a foreclosure is not going to make to many creditors interested in offering you new debt though. You can try a “Secured Credit Card”. This is where you deposit a sum of money in the bank issuing the card with the agreement that they can take it if you do not make your monthly payment. You deposit the same amount as the limit on the card. The bank is protected and you get to re-establish credit. If you’re interested in this then just do a Google search on it and you’ll find banks that offer the program. Good luck to you

  11. Estamos Cagaos says

    The main problem here is the US laws were written to protect the people of the USA NO MATTER WHAT!. The very USA cant even comprehend their own laws when issues like these arise, and therefore we are in a hard situation. Don’t worry folks, keep fighting for your home, dont give up, dont walk away. As long as you have the intent to negotiate, and in good faith, the home is going to be yours. If they dont want to negotiate, well then take it through ADVERSE POSSESSION!!!!!!!!!!

  12. Down on luck says

    Me and my husband have recently decided to seperate and divorce. He recently decided to move in with his girlfriend, leaving me with the house. Grant it both are names are on the mortgage, but there is no way I can afford the mortgage on my own and must walk away as well. This is the first house I owned and not sure what to do. I would like to do this properly and could use some advice. I am worried about the bank/mortgage company giving me a hard time. I doubt the house will sell considering the street is lined with abandoned homes. I want to talk with my mortgage company explaining the situation and explain to the them i must let the house go. Previously we also tried to claim bankruptcy but was stuck in a chp 13. The payment option given to us was more then we could afford month to month regardless of what we make. I am not to sure about my lawyer anymore regarding the bankruptcy…If there is someone that is willing to give me advice on this I would be highly appreciative. Thank you for your time… Really down on my luck:(

  13. says

    Down on Luck,
    You are correct in that you should immediately call your mortgage company and tell them exactly what is going on so you can work through getting the house sold in a short sale as opposed to a foreclosure. I can’t provide you with any type of legal advice. Good luck to you.

  14. Jessica says

    i am in trouble of loosing my home, i am 7 mnths behind, divorced and underpaid, of course my credit is already crap, but idk what to do!!! its listed as short sale for dirt cheap and no bites for almost 6 mths, idk weather to foreclose or give the keys to the bank, i don’t want them to sue me for the loan remainder esp. when my x is on the loan and i don’t have the money. he could care less he wants to file bankruptcy and i cant afford to….i’ve checked with the bank but they wont really give a straight answer on what they can and will do to me……any suggestions???? help!

  15. says

    If no one is biting after 6 months, you should revisit the list price. You have established that it won’t sell where it is currently priced. Keep reducing until you find a buyer. Make sure you have a strong negotiator to work with the bank on your behalf. Stay on it and do not give up.

  16. Luann Jenison says

    Ken,

    My husband passed away approx. 4 years ago we had some property and a home they all had very little equity…(and he had no life insurance) I am now down to just my home and the mortgage is about what the apprasied value is….My income has never been close to what is needed to pay my mortgage so I have been working from my life savings and I will be running out by summer…the house will soon be listed and I am about 2 months behind in payments…I have met a wonderful man and we would like to be married but I have to find away to get rid of this debt that is holding me back from moving forward with my life…what is the best solution to do …return the house …deed in lieu or wait for forclosure …etc…what would you recommmend? Not sure how long the bank will continue to hold on….

  17. says

    Luann,
    Glad to hear some things in your life are turning around! Unfortunately, I am not an attorney and I do not offer legal advice. For sure, the first thing to do is you should list the house and try to sell it. Good luck

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