Suppose I buy a house with 20% down payment, and then I default on my mortgage. The bank will repossess the house, and sell it, but what happens to the money? Do they get to keep the entire resale price of the house (including the 20% that I “owned”)? Or do they get to keep only 80% of the money and they have to give the remaining 20% back to me?
They get the money owed them and you get the rest. But they have no incentive to get a price higher than what is owed them, which kind of screws you.
And, IIRC, if they don’t get the amount due them from the auction, you’re still on the hook for the balance.
And they are trying to sell the house quickly, so that they get back their money as quickly as possible. They don’t have any incentive at all to leave the house on the market for a while to get a better price.
People who “flip” houses often buy them from bank foreclosures.
Once the bank is paid off and other mortgagees, you get the rest. But there’s usually nothing. Because if there was something, you would have probably sold the house yourself once you realized you were in trouble.
Say you buy a house for $200k and put $40k down. 5 years later, the house is worth $250k but you lose your job and can’t make the payments. Rather than let the house get sold at foreclosure, you will sell it for a quick $225 or so, pay off the bank, and keep $80k or so for yourself.
As my brother recently found out, he got a nastygram from an attorney demanding the $63,000 deficiency after a foreclosure sale. He paid $98,000 for the house in 1995, refinanced in 2001 for $112,000, foolishly refinanced to a 110% value mortgage 2 years ago then got hurt on the job just before his wife found out she had breast cancer. At the time of the foreclosure sale, they owed $121,000 on the house and almost $15,000 in attorney and collection fees. The house sold at auction for a little under $74,000 making my brother and his wife liable for the rest. Next stop, bankruptcy court.
Ideally, you’d work with the bank before they send out the sheriff. Banks don’t want your house, and foreclosure proceedings cost them a lot.
If you’re that far gone, you may be able to get them to accept a “deed in lieu of foreclosure” which in simple terms means you move out, sign the house over to them. hand them the keys and you’re done. Another option is a short sale, which is a similar process - you sell the house and the bank takes the proceeds and forgives whatever else might be owed. While unpleasant for both you and the bank, they’re generally willing to accept one of these options as it will save them thousands of dollars and months of time.
Either of these will be a much lesser stain on your credit report than a foreclosure, but they will certainly haunt you.
Very good point.
One problem with a short sale (which are becoming much more common in the current declining housing market) is that the IRS considers the difference between the short sale amount and the amount owed as income so you will owe extra taxes. Say as in racer72’s example that you owe $112k but the bank accepts a short sale of $74k. You’ll owe taxes on the $38k which, if youre in the 25% bracket could mean a tax bill of $9,500.
I’m kind of interested in the personal aspects of a bank forclosing.
How do they get you out? Do they send movers to pack you up? What if I default on my mortgage and literally do not move away at all? What recourse does a financial institution have? Who would force me onto the sidewalk and lock my house up, rendering me homeless? What of my personal property that is not a part of the real estate?
It happened to my neighbors.
He was involved in sub-prime lending when interest rates were low and getting lower. Everyone was re-financing and he would pay some company money for a big list of names (potential refis I guess) and get some kind of commission. Well, when the housing market soured/interest rates went up, he lost his job. The county sheriff came out and made them leave. Why he waited for that I don’t know. I thought they were having a garage sale or something when I left for work, I didn’t see the sherriffs car.
That’s right. Ultimately they evict you from the house just like a tenant who is not paying rent.
And they will remove you with force if they have to. A forclosure is a court matter, you’re basically sued out of your house for failure to honor a contract (the note that you sign at closing) and the sherriff is the officer of the court, so a couple of deputies will show up, and escort you off of the property to enforce the courts judgement of forclosure. Your stuff is generally still your stuff, but it will be carried out of the premises and you better have some way of getting it off the grounds, and quick.
Almost nobody has to be forclosed. If you miss a payment or two and have a good reason beyond “I just don’t feel like paying you” then the bank is usually willing to work out a new payment schedule. Not only does the house sell for less than the note is usually held for, but if you have mulitple liens on the house there is a repayment schedule for those people where the money owed is repayed in percentages. Say (just to keep it simple) that it goes in 5% increments. 5% goes to the first mortgage, 5% goes to the second mortgage, 5% goes to any non governmental leins on the property (if you have tax leins or such the government gets payed first, and usually at 100%, which is why your 1st mortgage lender charges you a “Tax monitoring” charge when you buy. Taxes are always to be considered the first lein on property. Same goes for unpaid income taxes that reach your property too) and so on, so if the house sells for 75% of the market value it’s not payed out where the second mortgage gets nothing. Everyone gets an equal share until the money is gone, so your primary lender ends up with less than 50% of the value of the loan. That’s a huge loss and they do not want to take huge losses. As long as you’re even close to financially solvent they’re usually willing to work out something, since that still usually makes them more money than the forclosure auction.
I don’t get it. Why would they count a debt as income?
But a short sale doesn’t produce debt, it forgives debt, which is considered income. See http://en.wikipedia.org/wiki/Debt_settlement#Tax_consequences
Whe Aestivalis said. The bank sends you a 1099 as if it paid you, and the whole reason they do that IIRC (as opposed to trying to collect the money from you over a period of years and a plethora of collection agencies) is because they can then immediately write off the loss themselves to the IRS, and they have completely washed their hands of the property.
The IRS isn’t always an ogre. If you do find yourself in the taxes owed situation, try working it out with them too.
I thought you still owed the difference. Guess not?
No. Let’s put some numbers to it, and it will probably make more sense.
You owe 500,000 on your house
The market tanks, you lose your job and have to sell.
The house is now worth 400,000.
You contact the bank and ask if they will take 400,000, they say yes.
You sell the house, the bank takes the 400,000 and life is good right?
Well no, because the IRS says that the 100,000 was income to you. You now have an extra 100,000 in income for that year. Except for the fact that you don’t have the 100 large, just the tax burden on 100 large. :smack:
I missed the fact that we’re not talking about a foreclosure. Sorry about that.