My husband and I have two homes. House No. 2 had a buyer with lease/option that fell through recently. We do not have the money to pay for two homes (rent will not cover mortgage). House No. 2 has a home equity loan attached to it. If we let it go back to the bank, can they attach the home equity on to House No. 1, the one we live in? We cannot sell House No. 2 for what we owe in this market.
If you allow House No. 2 to go into foreclosure, it is likely the amount received at auction will be much less than what you actually owe, which could leave you responsible for the difference, generally referred to as a “deficiency balance.” See the Bills.com resource Anti-Deficiency to learn your state’s anti-deficiency rules.
One option that you may have to free yourself of this obligation without owing a deficiency balance is through a “short sale,” in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process.
Contact your mortgage lender to discuss what it can do to assist you in selling through a short sale, and what are its procedures and requirements. Explain to the lender that you cannot afford your mortgage payments, and that you need to sell the property through a short sale to prevent foreclosure. To learn more about this option, see Deed In Lieu Of Foreclosure vs. Short Sale.
The answer to your question, and the best solution to your problem, depends greatly on your state of residence, as state laws regarding foreclosures and the enforcement of deficiency balances vary greatly from state to state. Although some states restrict the collection of deficiency balances, most states allow deficiencies to be treated like all other unsecured debts.
If you end up owing a deficiency balance on House No. 2, it is possible that the creditor may file a lawsuit against you to collect on the debt. If the court grants the creditor a judgment against you, the creditor may be able to garnish your wages, levy your bank accounts and/or place liens on your property, including your primary residence, depending on your state’s laws relating to the enforcement of judgments.
Also, if you allow House No. 2 to go into foreclosure, you can expect the foreclosure to appear on your credit report for seven years from the date it is entered into the public records, likely resulting in significant damage to your credit rating and your ability to obtain new credit.
State laws related to foreclosure and the collection of deficiency balances vary significantly, so I strongly encourage you to consult with an attorney in your area as soon as possible to discuss the problems you are facing. Your attorney should be able to tell you specifically what action the mortgage company can take to collect the debt if it obtains a judgment against you for a deficiency balance, and what actions you can take to protect your assets and mitigate the damage caused by the foreclosure.
You may be able to rid yourself of the obligation to continue paying on your second home by filing for bankruptcy protection. If you file for Chapter 7 bankruptcy, you may be able to surrender the property to the creditor and discharge any deficiency balance as part of your bankruptcy plan. However, you may risk losing that property as well, depending on your state’s property exemptions in bankruptcy. Again, I encourage you to consult with a lawyer who has property law experience to determine the best course of action available to you to resolve this outstanding debt. To learn more about bankruptcy, visit the Bills.com bankruptcy resources page.
Many Americans are struggling to keep their mortgages current during the economic downturn, so please know that you are by no means alone in the difficulties you face. You do not qualify for the Making Home Affordable program because your issue revolves around a second home, but I mention it here for readers who struggle with similar issues on their primary home.
I wish you the best of luck in finding a workable solution to this problem, and hope that the information I have offered helps you Find. Learn. Save.