"Do I Owe Money After Foreclosure?"

What happens after a foreclosure?

If you are not aware of the legal process in your market, it is important to learn. When the lender or bank forecloses on the property and they eventually sell the property for less than what was owed, then a deficiency exists with the loan. The deficiency is the difference between what the homeowner owed and the amount the property sold for.

For example, someone owes $250,000 on his home and the lender forecloses and sells the property for $200,000 at auction. There is a deficiency of $50,000 for which the lender can then sue the homeowner. That is the right of the lender. However, that is a practice that almost never occurs but, it is a legitimate concern for the homeowner.

If the deficiency judgment is granted, it would appear on the homeowners’ credit report just as any other judgment would appear.
What happens to the difference between the sale of the home and what is owed? During the short sale process, the homeowner can negotiate with the lender to not seek a deficiency judgment against him.

Some lenders as a matter of policy, will not seek a judgment against the homeowner because they feel they have waived their right by accepting a short sale however, if you can get them to openly acknowledge they will not seek a judgment; the owner will be more than happy.

There is a second issue as it relates to the deficiency and that is the 1099.

The lender will issue a 1099 to the homeowner for the difference. In the example above, the lender will issue her a 1099 for $50,000. This will have to be reported as income received and thus the homeowner will have to pay taxes on the $50,000 as though it was earned income.

Either way, the deficiency judgment can be of great concern to the homeowner. It’s real if the property sells on the courthouse steps. In my experience I have found that generally the lender will not seek a deficiency judgment because of the hardship.

There are a couple of options that the homeowner has as it relates to the deficiency judgment. In the example above the homeowner could file bankruptcy to address the judgment. The homeowner could also short sale the deficiency with the lender at a later date. In other words, offer the lender a lesser amount as “payment in full.”

Here is an important note. The lender, if they issue a 1099 cannot then sue for a deficiency judgment. The lender can only pursue one or the other. In other words, the homeowner can’t receive both a deficiency judgment and 1099 from the lender.

It is obviously in the best interest of the homeowner who faces foreclosure to be proactive and deal with the foreclosure. At least there is a chance that the investor can negotiate away the deficiency before it even becomes an issue.

 

Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
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