While losing your house to foreclosure can be a painful process, it's not without benefits. In most cases, families end up in foreclosure because they can no longer afford their homes. Getting out from under that house can help them restart their financial lives, even if it carries some long-term consequences.
Eliminates Monthly Payments
When you lose your house, you also lose your mortgage. If you can find a less expensive place to live, being foreclosed upon can reduce your monthly bills so that you can better afford your lifestyle. In addition, many homeowners stop making monthly payments during their foreclosure, although this can have a negative impact on credit scores.
Being able to go for a period of months without making housing payments can help you save up to move and help you build up a nest egg for future financial challenges.
Make a Fresh Start
While it can be challenging to lose your home, you also get a sense of closure on that portion of your financial life and the ability to make a fresh start in a new home. You could move to a different neighborhood or community or reassess your priorities and choose to live in a different way. Since you're going to have to make a change, you can benefit from turning it into a positive one.
Other than the obvious detriment of losing your home, one of the biggest drawbacks of a foreclosure is the damage that it does to your credit. Foreclosures typically drop your credit score by at least 100 points and stay on your credit report for seven to 10 years. However, if you use credit responsibly your score will frequently start recovering within two years.
While a foreclosure lets your bank sell your house to cover your debt, it doesn't completely remove your responsibility for your debt. If the sale of your house doesn't cover your entire balance, you could end up subject to a deficiency judgment and the bank can come after you for the remaining balance on your mortgage. The bank's ability to do this varies from state to state as does the lender's willingness to do this.
If you do end up with a deficiency judgment, your only option to remove it may be to file bankruptcy. An attorney can help you sort through your options for recovering from the foreclosure and its negative affects.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.