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
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
including a death in the immediate family, a
serious illness, a job transfer or a debilitating accident -- is
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
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.