Behind on your mortgage? A foreclosure may not be the answer, because even if you lose your home, your lender can still sue you for some of what you owe. This comes from Liz Pulliam Weston, the finance columnist for MSN. First, let’s go over the basics:
- A foreclosure is when a bank repossesses a home after the owner defaults on the mortgage payments.
- A short sale is when a bank agrees to sell a house at a loss rather than foreclose on it.
Banks don’t want houses, and they don’t want to take a loss. So, they sell them off as quickly as possible and can stick you with a bill for the difference between what you owed on your house and what they sold it for. For example, if you owed $300,000 on your home – but the bank was only able to sell it for $200,000, they could bill you for the remaining $100,000. So, here’s what to do if you’re about to lose your home:
- Tell your realtor you want the bank to agree to not come after you. Ask for a short-sale deal in which the bank will accept the proceeds of the sale as full settlement of your mortgage.
- Next, carefully look over any paperwork. Make sure you’re not signing a clause that holds you accountable for any debt after the sale.
- If your bank agrees to forgive your debt, the forgiven amount can be considered taxable income. Even though new laws allow taxpayers to exclude mortgage debt as income, there a lot of exceptions and limits – so, talk to a tax pro.
- If a bank does sue you for what you owe on a house, consider bankruptcy. A Chapter 7 liquidation can wipe out the judgment against you.
- Finally, before going through a foreclosure or short sale, know the state laws and your rights. You’ll find a comprehensive list online at ForeclosureLaw.org.