One of the growing trends in the thorny real estate market is referred to as “strategic default.” In this situation, the homeowner/borrower consciously chooses to stop making mortgage payments and walk away from their home. This results in a bank foreclosure ― the mortgage lender takes possession of the property and becomes responsible for it. However, it’s important to note that losing your house is not the only possible consequence of bank foreclosure. Foreclosure is a legal process that is sure to affect other aspects of your life.
The Financial Consequences of Bank Foreclosure
For certain homeowners, bank foreclosure may appear to offer some initial financial advantages ― they will no longer be making mortgage payments and can use that money for something else. Some may also find that renting a home costs less per month than owning. [See related article “Should You Rent or Buy a Home?”]
On the other hand, those who did not want to foreclose will likely experience more devastating financial consequences. Due to job losses or unexpected medical expenses, many homeowners have tried to keep up with their mortgage payments but still lost their homes to bank foreclosure.
Despite the potential immediate consequences of bank foreclosure, it is important to realize the long-term effects that loan default can have on your credit rating. A bank foreclosure will drop your credit score (possibly as much as 100 points!) and stay on your credit report for seven years. If you have a bank foreclosure on your record and, consequently, a lower credit score, it indicates that you’re a high financial risk. To be approved for future loans, you will then need to take the necessary steps to gradually re-raise your credit score. [See related article “Your Credit and Your Mortgage”]
In general, a low credit score means you will be paying a higher interest rate for loans. Over time, a higher rate could lead to paying thousands of dollars more in interest alone. A low credit score can affect your rates on home loans, auto loans, and credit cards. Now you can see how a bank foreclosure, by affecting your credit score, can substantially impact your personal financial situation. [See related article “How Your Mortgage Can Change Your Credit”]
The Emotional Consequences of Bank Foreclosure
It is important to also consider the emotional consequences of going through a bank foreclosure. Enduring the foreclosure process can be hard on many adults, who are likely upset and may feel betrayed by the system. Losing a home tends to put strain on relationships, and trying to find a new place to live can be a struggle.
The effects of bank foreclosure on children can also be difficult, as most children long for stability at home. Moving to a new neighborhood, transferring schools, leaving friends, and observing stressed parents can all weigh heavily on the young ones. Families undergoing bank foreclosure should try their best to work together, avoid placing blame, and make a strategic plan for their future.