- Understand whether you will be responsible for a deficiency balance.
- Review the collections process for delinquent mortgages.
- Consider the tax implications for any debt you have that is forgiven.
Can I default on my mortgage without any consequences?
Hi Bill, I own a home in Monticello NY about 2 and a half years ago, I bought it for around 130,000. The value of the home do to the current market conditions is about 80,000. I would like to default on this home, and just accept the losses I have totaled. However I would like to avoid any further debt or fee's or anything else beyond this point. The amount left on the mortgage is 120,000. How do I default without any consequences?
Unfortunately, I do not think that you can default without incurring fees or any other possible negative consequences. The negative consequences can result with the home being foreclosed upon. Foreclosure can be one of the most horrible financial experiences. You end up defaulting on too many mortgage payments and your home is taken away from you. Not only do you lose your home in foreclosure, but it can have a long-lasting impact on your credit rating. Below I will explain more regarding foreclosure.
Foreclosure is the legal process through which a lender (most typically a mortgage lender) claims an asset from the consumer borrower. Foreclosure is almost always the result of default on payment. A very important consideration for mortgage payment is that lenders cannot take partial payment on the mortgage monthly payment. What that means is that, unlike a credit card, you cannot mail in a portion of your payment -- a mortgage payment is all or nothing. This also means that if you miss one payment, the next month you have to re-pay the current month and all arrears.
A judicial foreclosure basically means that the foreclosure is a court-ordered legal process. Instead of a trustee, the foreclosure actual moves (sometimes moves very slowly) through the court system. In states that use a judicial foreclosure process, the mortgage deed or mortgage lien does not have a forced power of sale clause so as a result the lender must take the homeowner to court.
Many states avoid the judicial foreclosure process, and instead use a document called a "deed of trust" instead of a mortgage. Because the word "mortgage" is so ingrained in our language, it is common in deed of trust states to refer to these as "mortgages" even though it is inaccurate. California is an example of a deed of trust state. In these states, a lender notifies a delinquent borrower with a notice of default. Since the mortgage loan terms already specify that a sale process kicks off right away (without going through the court system) -- the lender can start the foreclosure process very quickly. Then the borrower has a fixed period of time (which varies state by state) to either sell the home, or negotiate to solve the financial problem. If the consumer does not accomplish this on their own, the mortgage lender then can come in and auction off the home to the highest bidder.
Foreclosure auctions tend to bring significantly less money than a normal sale would bring. If the sale brings less than the amount owed on the loan, the remaining balance of the loan may be considered a deficiency balance. Most states allow creditors to collect deficiency balances on home loans, meaning the creditor could sue and obtain a judgment against you if there is a deficiency balance. A large deficiency balance could cause your significant problems in the future, such as wage garnishment and bank levies. However, it should be noted that although creditors have the right to sue a homeowner for a deficiency judgment, an analysis of court records show that this is a rare event.
Foreclosure will be reported to the major credit reporting agencies, and it will result in a severe decrease in a credit score. The record of a recent foreclosure will also make it difficult to qualify for a loan in the near term. Clearly foreclosure is not an attractive option, and should be avoided if at all possible. If you can remove yourself from a mortgage and avoid foreclosure through alternatives, then do so. You may want to consider a short sale.
A deed in lieu of foreclosure and short sale vary in their legal details, but get the distressed homeowner to the same place -- selling the property for less than the balance of the loan, and oftentimes with the creditor forgiving the shortfall.
Why would a creditor agree to a deed in lieu of foreclosure or a short sale? The creditor 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.
Here is the typical (although by no means exhaustive) list of short sale requirements: a) the residence must already be on the market for a certain number of days (90 days is typical), b) there can be no liens on the property, c) the property cannot already be in foreclosure, d) the offer of a deed in lieu must be voluntary, e) for a short-sale, the seller must have a hardship, f) the house must be priced reasonably.
Contact your mortgage lender to discuss what it can do to assist you in selling the property through a short sale or deed in lieu of foreclosure, 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.
Regarding what will happen if you do not resolve your debt, see the Bills.com resource Collections Advice to learn your rights and the rights of creditors. Specifically, this resource will explain about liens, wage garnishment, and account levy.
Under federal law, a creditor is required to file a 1099C whenever it forgives a loan balance greater than $600. This may create a tax liability for the former property owner because it is considered "income." However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some loans forgiven in 2007 through 2012. See the IRS document "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" and the Bills.com document Mortgage Forgiveness Debt Relief Act to learn more.
I hope this information helps you Find. Learn & Save.