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Consequences of Allowing a Home to go into Foreclosure

In a foreclosure, what happens if the house is worth less than what I owe to the mortgage company?

I have a question about foreclosure. I can't make the payment for my first mortgage as well as the equity line of credit anymore. I am going to let it go, but I would like to know if the house is sold for less than what I have owed the first and the equity line. What actions can they go after me after the house is sold and there is deficiency? My house is in California. I know that the credit score will be bad, but can they go after me like credit card creditor or is it different? Please advise.

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Highlights

  • Review the consequences of foreclosure.
  • Your responsibility for a deficiency balance depends, in part, on the state you live in.
  • Speak with a bankruptcy attorney, if collections ensue for a deficiency balance you owe.

If a home is foreclosed upon, the mortgage lender usually auctions the property at a foreclosure sale, applying whatever amount is received at the foreclosure sale to the debt owed on the mortgage. In many cases, the sale price at auction is not sufficient to cover the mortgage and other secured liens on the property, such as home equity loans; the difference between what you owe on the property and what the lenders actually receive is called a deficiency balance.

In California, mortgage lenders generally cannot pursue borrowers for deficiency balances resulting from foreclosure on loans that were used to purchase a borrower’s primary residence. However, deficiency balances on non-purchase loans generally can generally be collected like any other unsecured debt.

Whether a deficiency is created on any of your loans will depend on the total amount of your loans compared to the value of the home; for example, if your home is worth more than the total amount of your loans, your loans may be covered by the auction sale price. If you would like to read more about the foreclosure process, I encourage you to visit the Bills.com foreclosure page.

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

If you decide to allow your home to go into foreclosure, and assuming that the foreclosure sale does not cover the full amount of your mortgage or home equity loan, you will likely owe a deficiency balance. As I mentioned, your first mortgage lenders cannot generally come after borrowers in California for deficiency balances. However, your home equity lender may pursue you for the collection of any deficiency balance on its loan. Its collection efforts could range from simple collection calls and collection letters all the way to filing a lawsuit against you for the balance owed. If the creditor does try to sue you, and if the court grants it a judgment against you, the creditor may be able to garnish your wages, place levies on your bank accounts, and place liens on any real property you own.

Due to the possible negative consequences of the creditor’s taking legal action against you to collect on a deficiency balance, if you are notified that you owe a deficiency balance after the foreclosure of your home, I encourage you to work with the creditor to repay the debt.

From my experience, most mortgage and home equity lenders are willing to offer flexible repayment terms to borrowers who have defaulted on their loans. However, if you find that the deficiency balance claimed is too large to pay off within a reasonable time frame, or if the creditor is unwilling to work with you to establish workable payment terms, you may wish to consider filing for bankruptcy protection to resolve your deficiency balance. I strongly encourage you to consult with a qualified attorney in your area if you are considering filing for bankruptcy protection. In addition, I invite you to visit the Bills.com bankruptcy page.

Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

Before you consider surrendering the property to your lenders, you should do everything in your power to sell the home. If you can find a buyer, you should be able to rid yourself of the home without the credit damage caused by a foreclosure. You also may be able to pay off your mortgage loan and free yourself from these obligations. For information about ways to stop foreclosure, you should review the foreclosure information from the US Department of Housing and Urban Development. Unfortunately, in the current housing market, many homeowners find themselves owing more on their mortgages than their homes are worth, a situation which the mortgage industry refers to as being “upside down” on a mortgage.

Even if you cannot find a buyer willing to pay enough for the home to pay off what you currently owe, you still may be able to sell the property for less than your mortgage balances, though you will need to negotiate an agreement with your lenders to accept less than the balance of the note to pay off the loans.

Selling a home for less than the balance owed on the mortgages is called a “short sale;” such transfers must be approved by the lenders prior to the sale. Lenders that agree to a short sale will frequently forgive any balance remaining on the note after the sale proceeds are applied, though they usually require borrowers to provide documentation of financial hardship, such as job loss or unexpected illness, before they will approve a short sale. You or your attorney should contact your lenders to discuss selling your property in a short sale if you think that may be a workable option for you.

I encourage you to explore all options available to you to avoid voluntary surrender or foreclosure of your home, as losing your home will likely hurt you financially and negatively impact your credit rating for as long as seven years. These credit problems could prevent you from qualifying for a mortgage for a new home, cause you problems leasing an apartment, and force you to pay significantly higher interest rates for any credit you are able to obtain, which could cost you thousands of dollars in interest charges over the next few years.

I wish you the best of luck in resolving your financial troubles.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

6 Comments

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  • CG
    Nov, 2011
    Cynthia
    My house got foreclosed. Could I travel internationally without having to experience problems? Please advise. Thank you.
    0 Votes

    • BA
      Nov, 2011
      Bill
      Foreclosure is a matter of civil law, unless fraudulent. While debts arising from foreclosure can affect your income, credit, and assets, they do not affect your ability to receive a U.S. passport and travel internationally.
      0 Votes

  • BA
    Feb, 2010
    Bill
    In the event of foreclosure, the debtor is responsible for any deficiency balance regardless if there is one, two or more mortgages on the property. A deficiency balance is an unsecured debt, and as such is similar to credit card debt, medical debt, or a payday loan. Some states have antideficiency statutes that make it impossible to collect on a deficiency balance. Consult with an attorney in your state to determine if yours has such laws. Regarding The Mortgage Forgiveness Debt Relief Act and debt cancellation, see the IRS document I just cited.
    0 Votes

  • 35x35
    Feb, 2010
    Glenn
    Bill...I think this is really great!! I have two questions. I currently owe just shy of twice what my house is worth at the moment. I have owned my house for 4 years and when I bought it I got what my bank called an "80/20 loan". Basically I borrowed my down payment 20% in conjuction with borrowing the main portion of the sale price of my house. This created a situation where I make two seperate payments each month. One is "mortgage" the other is "equity line of credit". My first question is if my house were to go into foreclosure this would only involve the "mortgage" portion of my loan and not the 20% borrowed for the down payment? My second question is..I read recently that any dollar amount "forgiven" under foreclosure can be taxed by the IRS as financial gain?
    0 Votes

  • BA
    Sep, 2008
    Bill
    Yes, the statute of limitations would be applicable on this debt. The statute could run up to 10 years in some states, check for your state rules at http://www.bills.com/collection-laws/.
    1 Votes

  • HE
    Sep, 2008
    Herman
    Hi, I understand about the deficiency balance and I have one after the sale of my foreclosed home. My question is... I have not heard anything from the creditor about the deficiency and it has been 4 months. Is there any time limit as to when the creditor has to act on the payment of the deficiency? I do not want to have to file bankruptcy unless i have to. Is there a Statute of Limitation on this? Thanks, Herman
    0 Votes