If you’ve been following the earlier installments in this series, you should know that there are options available to homeowners who find themselves with no equity. Please know that it is important for anyone who ends up on the wrong side of the real-estate downturn to investigate all of their options, get expert advice and make sound decisions. While it may be tempting to throw your hands up and quit, the long-term consequences are too significant to not make every effort to resolve the situation as positively as possible.

When considering those consequences, be aware that there are two primary negative impacts from a foreclosure. The first consequence is the possibility of financial liability after losing the home. Since the laws governing foreclosure vary greatly from state to state, you must consult a local expert familiar with the guidelines you will face. For example, California is a trust deed state that relies on non-judicial foreclosures. Without getting in to the specifics of what those terms mean, the bottom line is that a lender can not recover any losses resulting from the default of a mortgage used to purchase a home.

On the other hand, Florida relies on judicial foreclosures, which expose defaulting homeowners to the risk of a lender lawsuit seeking to recover losses. To complicate matters, refinance loans to take cash out — especially home equity lines of credit — are treated differently, allowing the holders of defaulted loans to seek damages from the borrower even after the home has been taken.

This is why it is critical that you consult a local expert familiar with the laws governing your state and your specific situation. But regardless of your state’s laws, lenders are willing to negotiate and work with defaulting borrowers, as a cooperative homeowner will result in a smaller net loss to the lender. Find a real-estate expert who knows the laws, knows the lenders and knows how to negotiate.

The second negative impact of losing a home is the effect on your credit. Looking back to the options available (loan modification, short sale, deed in lieu of foreclosure, foreclosure), the further you move down this scale towards foreclosure, the worse the impact will be on your credit score and the longer lasting the score reduction will be.

Since the credit bureaus are constantly tweaking their scoring models, it is very difficult to say how large an impact each option will have on your score. However, it is safe to say that avoiding foreclosure and any deficiency judgment will go a long way in terms of protecting your score and allowing it to heal as quickly as possible.

When someone is facing foreclosure, the thought of buying another home is likely the furthest thing from their minds. Eventually though, most people will want to own a home again someday. With the subprime market in shambles, a foreclosure will likely mean not being able to qualify for a mortgage for at least two years. In addition, you probably will need to get your scores back above 620. The less damage you do to your credit during the foreclosure or short sale process, the easier it will be to recover.

I know this is a difficult subject with many things to consider, but hopefully we have given you a better understanding of the options available, even in the direst of situations. While the decisions you end up making are very personal, we are here to help. If you have any questions on this subject, feel free to contact my real estate expert, Josh Lewis, via email or by phone at 888.944.5674.