Legal Consequences of Foreclosure

First, a foreclosure stays on your credit report for 10 years. You will not be able to purchase another home for 7 years per Fannie Mae rules (there are some special cases).

Your lender can sue you for the deficit (the difference between what you have due and what they received from the sale of the house). If they do, then the court will issue a deficiency judgment. One option that they have is to have your salary garnished for the shortfall.

Your lender can give you a 1099 form for the shortfall. If they do, this means that the IRS will consider this amount as income. You could also owe capital gains taxes as well.

Until your lender either sells the property or files paperwork with the county Register of Deeds Office to eliminate your name from the deed, then you are still the legal owner of the property. Therefore, you will be legally responsible for any destruction done to the residence and for anyone harmed while on your property, even if they are trespassing. This could potentially make you vulnerable to a lawsuit.

Once a foreclosure is on your credit report, you could have trouble renting a place to live. Most apartment complexes run credit checks on potential renters. You will also have trouble buying a car as well unless you can pay cash for it. Some auto insurance companies will run your credit to determine your insurance premium. If they do, they could refuse to cover you or charge a higher rate.

For house owners with second mortgages or home equity lines of credit, the situation is even worse. Your second lender will incur the most loss during the foreclosure procedure and they are probably going to seek court action against you. The laws that keep the lender on your first mortgage from suing you often do not apply to second mortgages and lines of credit. This situation could put you in financial difficulty for years to come.