While most homeowners may think a foreclosure will clear them of debt on private loans, this isn't always the case. Even if your home sells as a pre foreclosure, at foreclosure auction or at a short sale, it may not be enough to cover the debt owed to your mortgage brokers. This is especially true today. Due to the slumping housing market, many money lenders are foreclosing on houses that are now worth much less than their original mortgage. Even if your home sells for hard money at a foreclosure sale, it may not be enough to cover the original mortgage amount, and you could be held responsible for that after a foreclosure.
In many cases, however, the lender doesn't expect to earn back the full amount of the mortgage from a foreclosure sale, and if the amount still owed is negligible, they may not seek to collect. But if they do, the usual course of action is for the lender to seek a deficiency judgment from a court allowing them to legally seek to collect the remaining debt.
Another thing to consider is your tax liability for a home that doesn't sell for the full value of its mortgage. Here is an example: If you receive a mortgage loan for $200,000, and then your home sells for only $150,000 at foreclosure auction, there is still an unpaid value of $50,000. For tax purposes, the IRS considers you to have earned that money. When we borrow money, whether for private loans, a commercial mortgage or commercial loan, or for our own homes, we receive the full value of the loan. If we don't pay it all back, then we have 'earned' that money, in the eyes of the tax collectors. You may receive a 1099, or tax debt form, showing that you owe taxes on that 'income' of $50,000.
If you have any second mortgages on your home, it's also important to consider whether or not a foreclosure sale will cover the amount owed on that loan as well, as you may be held responsible for paying it in the same fashion.
Just like with credit card debt, it's far better to take appropriate steps to avoid foreclosure before you find yourself in this situation. Act early to combat a mortgage default and you won't find yourself in the uncomfortable position of having money still owed to the lender after foreclosure.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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