A second chance after foreclosure

Issue December 2011 By Scott J. Clifford

There are all kinds of reasons why someone might stop paying the mortgage, but the end result is the same - loss of the house to foreclosure. For someone who dreams of one day owning a house again, going through this process can feel like a door shutting on any chance of future home ownership. But with patience and discipline, a second chance may just be a few years away.

While in the midst of the foreclosure process, it's important to remain cognizant of one's overall credit standing. If at all possible, one should stay current on all other bills, especially any outstanding credit card debt. Every late or missed mortgage payment will still appear on a credit report, but the impact of that line item will be diminished if other accounts are kept in good standing.

Also to keep in mind is the potential tax implication of a foreclosure. If a foreclosed-upon house sells for less than it is worth, the remaining amount of the loan may be forgiven. This sounds like great news. However, the IRS considers the amount of the forgiven loan a "gift," and come April, the former homeowner may be taxed on the amount.

As one plans for buying a house again, it's important to stay grounded in reality. Interest rates in the 3s should not be expected, nor should buying another house without a sizable down payment. Additionally, there are waiting periods and more stringent requirements associated with obtaining a mortgage after a foreclosure, although these requirements vary by lender.

Typically, a foreclosure will remain on one's credit report for seven years; this doesn't mean, however, that someone will have to wait those seven years before obtaining a new mortgage. The waiting periods typically range between three and five years; if the foreclosure is an isolated incident, the waiting period may be less than if there are several unfavorable credit occurrences on one's report. (Some lending companies may even award a new mortgage just two years after a foreclosure, although usually an extenuating circumstance -- 
including a death in the immediate family, a serious illness, a job transfer or a debilitating accident -- is involved.)

During this waiting period, it's best to take advantage of the time. Building up savings, paying down credit card debt (to lower one's debt-to-equity ratio and thereby raise one's credit score), and establishing a record of on-time rent payment can all go a long way to enhance one's position when one becomes lending-eligible to buy a new home.

Of course, there is a way to circumvent lending requirements, waiting periods and high interest rates -- by purchasing a home with cash. By substituting the need to possess substantial earning statements and strong credit scores with patience, planning and fiscal discipline, as well as a mass of cash, a buyer can better negotiate the sale price, as well as end up with a higher 
net worth.

Granted, it's a challenge to save up enough money to buy a house (typically about 20 percent of one's income over several years). Selling other assets or obtaining a second job with an income that can be devoted entirely to the new house savings can help to reach the financial goal more quickly.

The American dream of home ownership does not need to end with foreclosure; it just means a rededicated effort to fiscal planning and a determined spirit.

Scott J. Clifford is a partner at Epstein, Lipsey & Clifford PC in Hanover, Mass. A graduate of New England School of Law, he is admitted to practice in all Massachusetts courts and U.S. District Court in Massachusetts. He is a member of the Massachusetts Academy of Trial Lawyers, the Massachusetts Bar Association and the Real Estate Bar Association.