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Concerned Shopper | What happens if a foreclosed home sells for a LOT less than it is worth? |
In all this national talk about foreclosures, does anyone with a legal background know what happens to the homeowners if the bank short sells the property for a lot less than is owed on it because there are no buyers. Suppose there are just NO buyers and the bank forecloses on a house that is appraised at $500K but there is a $350K loan on it. But even with such a large discount the bank still can't sell the property for $350K and instead sells it for $275K. Does it still attempt to collect the difference from the original homeowner -- after all, it's not the homeowner's fault that the bank took a bad offer b/c it was unwilling to wait for a better one. |
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rlloydevans
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2 things happen
1st- in most cases the bank has the option to sue the former owner for the money not collected at the foreclosure sale, in this case the additional $75k. This would involve a court judgement and collection actions.
It is not the homeowners fault, but it is the homeowner's responsibility to see the debt is paid back in full. If they can't pay by payments then they must by foreclosure, and if the foreclosure doesn't work then they are still responsible for the remainder of the debt. Only a bankruptcy, or an agreement with the lender, can discharge an unpaid debt.
By the way, the bank has a fiduciary responsibility to both the former owner and their investors to get as much out of the sale of the property as possible, and they try, often too hard. The problem is that owners normally stop doing maintenance on the property, and often tear up the property when they leave, stealing sinks and knocking holes in walls. Then the property sits vacant for several months and damage happens, vandals spray paint on the walls, and suddenly the $500,000 house is only worth $275k to a rehabber.
I buy propeties from banks and they don't sell for such a low price unless they absolutely have to. I have seen times when a bank has refused what I considered a reasonable offer, then the property was damaged by winter weather, and the house eneded up selling a year later for 40% of the price they could have gotten if they hadn't tried to hold out for more.
2nd- The former owner will have a tax liability as the IRS rules that the foreclosed debt of $350k dollars is income, so the seller next year will find the IRS wanting an additional $100,000 in income taxes - which normally drives the foreclosed homeowner into bankruptcy (personally, I find this one of the stupidest tax laws we have and I hope they change it soon). |
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Carolinahomerates.com
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depends on the state.
a lot of states have 'deficiency judgments'
this means that the borrower will pay the difference with interest/fees.
Some states dont have this...soo the lender is out of luck.
PMI may cover the mortgage if it was actually paid on the mortgage |
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venicefloridarealtor
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There are a lot of possibilities here, and some of this depends upon whether this is a first mortgage, or a home equity line.
In any event, the lender has the option of going after the owner for the remaining balance due after sale.
This is why it's very important to work with your lender on a refinance, if possible (perhaps take a 30 year loan and make it a 40 year loan, and tag on the missed payments on the end of the loan). This will reduced the size of your monthly payment substantially and also bring you current, and save your credit rating.
If not possible, then work with your lender on a Short Sale and ask them to waive IN WRITING pursuing you for any balance remaining on the loan after sale.
The IRS can still come after you for the balance that was forgiven, because they will see this as a benefit to you, and taxable income at your regular taxable rate.
However, you can talk to an attorney about qualifying to claim "insolvency" or filing bankruptcy, and how this may save you from collection from both the lender and the IRS.
Good luck and best wishes. |
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thylawyer
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The bank/mortgagee will take what it can get, and often winds up making the sole bid. The lower their bid, of course, the more likely they will make a "profit" on the resale. The "profit" will be more than offset by the loss on the mortgage and the expenses of foreclosure, giving it a real tax break.
The balance of the mortgage due, penalties, foreclosure and resale costs, etc., are all the responsibility of the mortgagor (debtor). If the mortgagee goes to court, it will get a judgment that will be a black mark on the debtor for 10-20 years.
The mortgagee could "forgive" the debt, but then they get to send a 1099 to the debtor, since a debt forgiven is income to the debtor. Right, he has to pay taxes on all that money he didn't have to pay after all.
The debtor(s) can avoid this nasty outcome by filing bankruptcy. |
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bostonianinmo
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That depends upon how the mortgage contract is worded. If it's without recourse then the bank loses; what they get from the sale is final. If it is with recourse they can go after the homeowner for the shortfall. Some states such as CA do not permit recourse mortgages on purchase money mortgages.
The fact that the home appraised at $500k at some point in the past is irrelevant to the present-day value. It's entirely possible in some markets that a home that appraised for $500k 18 months ago may only get $275k today. That's the nature of a collapsing market. |
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havanablu
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It all depends upon what state you live in. Some states allow the banks to come after you for the difference. However, in most cases the bank doesn't come after you because the reason for the default initially was lack of funds. Basically, it depends upon the state laws and the moral decency of the lender. I would check with a real estate attorney in your jurisdiction. |
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Frankie
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The bank just takes the hit but the borrower takes a foreclosure stamped to his credit history. |
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wish I were
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No your right, it's not the bank's fault. It's the homeowners fault for letting their house go into foreclosure in the first place! Yes the homeowner will still owe the balance! It's not up to the bank to get the best price it can! It's a pain for the bank to have to deal with it in the first place. So not only will you owe the balance on the loan, you will owe the attorney's fees on the process as well! You need to take responsibility for the problems you created!!! I work for an attorney that has to deal with this on a daily basis!!! |
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PoPtArT
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Then the homeowner has to make up the difference, you cant just foreclose and walk away, you will kill your already struggling credit rating, think hard before considering foreclosure. |
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rachelrmf@sbcglobal.net
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yes they do still try and collect the difference |
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Scotty Doesnt Know
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When a home is foreclosed upon, the bank can obtain a judgment against the original borrower for the difference between what is still owed on the loan and what the house sold for, if the bank so chooses.
Typically, that doesn't happen, because the original borrower has nothing left, or they wouldn't be in foreclosure.
The homeowner has the obligation to repay the bank loan in its entirety, regardless of what the home sells for. |
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