Even though the lending guidelines continue to change, FHA requires up to 4 years and Fannie Mae up to 7 years waiting period as foreclosure consequences. Even if it is possible to reduce this period with extenuating circumstances, most lenders believe it is unlikely. Historically, homeowners after foreclosure wait for seven years to finance their next home. However, if you compare foreclosure versus short sale, the waiting period can be only two years for the latter. This explains five years of unnecessary renting, if the home owner fails to avoid foreclosure consequences before it was too late.
The financial cost of the additional five years of renting in foreclosure versus short sale scenario equals the opportunity cost of not owning your own home. It will add to the average loss of $250,000 per household on a home priced at $200,000 in the following way:
- The cost of tax breaks. According to the U.S. Tax Code, you can deduct the interest on your mortgage, your property taxes, as well as some of the costs involved in buying your home. Over five years, it can add up to $15,000-20,000.
- Federal income tax savings. For a married couple, you can take up to $500,000 ($250,000 for single) as gain without owing any taxes.
- Appreciation. According to the National Association of Realtors, real estate has long-term growth in value with an average increase 6.5 percent each year from 1972 through 2005. On a median-priced home it can be $80,000 over five years.
- Historically low interest rates. If you miss the current market opportunity, you could add $300-400 per month in higher interest rate as another foreclosure consequence. It could add up to $150,000 of additional interest paid out of your pocket.
- The risk of anticipated inflation. It could dramatically reduce your purchasing power. The same payments will afford you only $150,000 home instead $200,000.
- Equity. Money paid for rent is money forever lost. Money paid for your mortgage could buy down equity in your home up to $11,000-12,000.
- Emotional factors as unnecessary foreclosure consequences, if you fail to compare foreclosure versus short sale benefits. What about the inconvenience of uprooting kids from schools, friends, and desired neighborhoods? What if the landlord decides to increase your monthly rent? What if the landlord will not renew your annual lease agreement?
Therefore, if your loan modification falls through and you are comparing foreclosure versus short sale options, research both options with a trusted expert on your side. Do not walk away angry and disappointed. Do not let your family suffer costly foreclosure consequences. Do not let the bank sell your home for you. Sell you home on a short sale and save your family $250,000 in unnecessary losses. Save your credit and avoid multiple unforeseen foreclosure consequences down the road, when owning a home is only one of them.
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