Q. What are the effects of a foreclosure on someone’s credit? I’m thinking of walking away from my Florida property, which costs me, net after rental income, $1,000 per month. The house is worth $10,000 to $20,000 less than the existing mortgage. What happens if I do that?
— House poor
A. Walking away from your property and allowing the bank to foreclose can have a huge impact on your credit score, your future ability to borrow and even your tax return. It’s not a move to be taken lightly, and certainly without the advice of a good attorney and accountant who know your entire money situation.
“Walking away from a loan or asking your lender to proceed with a short sale may not be a viable option and, even if it is, there will often be financial consequences,” said Ron Numon of Quest Property & Development in Flemington.
Foreclosure is the forced sale of the property, commonly through an auction, and the eviction of the homeowner. This typically happens through what is known as a Sheriff’s Sale, Numon said. How this process works and how long it takes to complete varies from state to state and is guided by whether or not the state uses judicial or non-judicial foreclosure proceedings.
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We live in California and below is a timeline showing properties we purchased and the situation we are in today:
2002: Purchased new home as primary residence (House #1) for $235K; put 20% down, and paid loan down over the years to about $180K
2005: Refinanced House #1 and took out $200K; new loan amount became $380K (one loan, no second); we used the $200K to buy a 5-acre ag property all cash
2009: Purchased another home (House #2) for $380K and rented it out; put 20% down, new loan amount approximately $300K
2010: Purchased another home (House #3) for $350K and moved in to it; put 20% down, new loan amount approximately $280K
After moving out in March 2010, we rented out House #1 for $1500 per month. The payment is $2700 per month. We want to walk away from it purely as a business decision since the value of the home is only about $180K and the loan is $380K and we would be shelling out $1200 per month to cover the mortgage payment after receiving rent.
We tried to short-sell… we got an offer for $200K and the bank (BofA) said no. We decided to stop making payments (though kept collecting rent) for the past 7 months. We received a Notice of Default letter on 12/20/2010. It said the house sale date will be 3 months later, sometime in March 2011.
Questions:
1. Should we let it foreclose or try to do a deed in lieu of foreclosure?
2. Which of the above options is better from a tax perspective?
3. Can the bank from House #1 come after us (meaning, our other properties or judgments against us) once we foreclose?
4. Would we qualify for the mortgage debt relief act? (thereby not being required to pay back the bank or the IRS for the 1099-c or 1099-a, depending what we receive later from the bank)
5. After foreclosing, if the bank sells the house for about $180K and our loan was $380K, are we responsible for reporting the difference of $200K as taxable income?
6. Since we lived in House #1 for 8 out of the last 9 years, would it still qualify for our primary residence? (which may be a factor for question #5)
7. Since we refinanced in 2005 and took money out for purchasing another property in 2005, will this disqualify us from the mortgage debt relief act?
I am not concerned about our credit, but my only two concerns are 1. The bank coming after our other assets after foreclosing, and 2. The IRS hitting us with a huge income tax bill (it would be well over $100,000 I’m sure).
Given our situation, I don’t expect anyone to feel “bad” for us, but I’m just trying to get advice on making the best business decision. Truthfully, my wife and I worked hard to buy these properties, and are just trying to make the best choice given our circumstance. I’ve talked to 2 different lawyers and got 2 different answers… one saying we’ll be fine and will not have to pay the bank or the tax upon foreclosure (as many are doing now)… and the other says we will have to pay the tax and the bank can still come after us. Being an internet opinion page, I don’t expect accountable legal advice, just want to get other perspectives if you want to comment. Thanks.