Foreclosure frustrations

By DALE KASLER
Sacramento Bee

The emotional scars are obvious: the embarrassment, the broken marriages, the families uprooted.

But homeowners who lose their properties to foreclosure also face nuts-and-bolts financial problems that will continue well after they turn out the lights and turn over the keys.

The foreclosure will count as a black mark on their credit history for seven years, said Judy Thompson, a housing specialist at nonprofit credit counselor ByDesign Financial Solutions in Stockton.

“Foreclosure is one of the worst things you can have on your credit history,” she said. During those seven years, families will find it harder to buy another home or even rent a place, Thompson said.

Lenders will demand higher interest rates, if they make the loan at all. Some property managers will require higher security deposits or just refuse to rent to someone who’s been through a foreclosure, she said.

Thompson and others said the foreclosure victims should make it a priority to try to restore their old credit standing. “They have to be working on getting their credit as high as they can,” she said.

Homeowners who are in danger of foreclosure could try to arrange a short sale, in which they unload the property for less than what the bank is owed. Short sales, like foreclosures, remain on one’s credit history for seven years. But they create less of a negative mark than foreclosure because they benefit lenders, Thompson and others said.

Lenders prefer short sales over foreclosures because they don’t have to go to the time and expense of selling the properties themselves. A short sale can easily save lenders thousands of dollars in fees, and that translates into less of a black mark for the former homeowner.

“You were proactive, you contacted the bank, you didn’t walk away,” said Derek Kirk, an Elk Grove real estate agent who specializes in short sales.

The problem is, a lender can - and sometimes will - refuse to accept the short sale, to the frustration of the homeowner.

Lenders might reject the deal because, among other things, they believe the sale price is too far below market value, said Wells Fargo spokesman Jason Menke.

Another problem with short sales is the tax consequences. If a house sells for, say, $100,000 below the loan value, the shortfall would constitute a forgiveness of debt and could be counted by the Internal Revenue Service as taxable income under certain circumstances, Thompson and Menke said.

Finally, losing one’s house doesn’t necessarily mean the homeowner is free of debt. There could be additional bills to pay, which might force the person into bankruptcy.

The 2005 overhaul of the bankruptcy code makes it harder to escape one’s debts, said Sacramento bankruptcy lawyer Peter Macaluso. If someone is earning above a certain income level, he or she could be forced to file a Chapter 13 bankruptcy, which has much tougher rules on debt repayment than a Chapter 7, Macaluso said.