What If You Decide to Let Your House Be Foreclosed & Don't Want a Loan Modification?

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Homeowners who find themselves unable to pay their mortgages may be offered several options by their lenders and government programs, including loan modifications. However, they don't work for everyone. If you don't want to modify the mortgage on your home and you've decided that other options such as a short sale or deed in lieu of foreclosure are also out of the question, prepare yourself for the inevitability of foreclosure.

Credit Score Woes

A foreclosure will cause your credit score to plummet and you likely will have a hard time getting any type of credit for at least two years. Not only will your foreclosure impact any new credit accounts, it can also raise your interest rates on current credit cards, even those you pay regularly. Credit cards have a default rate in place, which means if you default on any of your credit obligations those cards can raise your interest rate as high as 30 percent. When you go looking for a new job, you might be subject to a credit check as well, in which case you might have to explain your foreclosure.

Housing Needs

A foreclosure means being evicted from your home, so you're going to have to find new housing quickly. It's best to plan ahead and not wait until the sheriff shows up with a new lock. Buying again will be out of the question for at least three years when you have a foreclosure on your record. When you fill out a rental application, you may have to disclose the foreclosure and landlords always check credit. Prepare to pay a higher security deposit or line up a co-signer for your lease. When you choose foreclosure, you forfeit the relocation payment that many banks offer after a short sale or a deed in lieu of foreclosure.

Tax Implications

The IRS considers a debt you don't have to pay as income, which is subject to taxation. You must declare the amount of your canceled mortgage as income on your tax return. If your foreclosure is included in a Chapter 11 bankruptcy filing, you may be able to avoid declaring your canceled mortgage as income. Talk to the IRS or a tax specialist about the tax consequences that apply in your case. If you live in a state that requires you to pay a deficiency balance to your lender after the sale of your foreclosed home, you will also be responsible for that bill.


Even if you take control of your financial crisis and choose foreclosure over a loan modification, you will still have a lot of grief, stress, anxiety and loss to deal with. Losing your home might mean changing schools for your children and saying goodbye to a neighborhood you have grown fond of. There is also the social stigma of foreclosure and the feelings of failure you may have to work through. Get support from friends, family members and others who are facing the same situation.